Engie Energia Chile, a leading electrical power distributor, announced in early January it secured a loan for building an energy transmission line between the nation's two power grids. The local subsidiary of Italy’s Engie agreed to develop the project jointly with Red Eléctrica in late 2015, but had struggled to drive the project to financial close.
According to an EEC statement, its 50%-owned unit Transmisora Electrica del Norte (TEN) finalised a US$460mn senior international loan, along with another senior local loan for CHP154bn (US$228.7mn), maturing in 2034. A further CHP73.5bn will be borrowed to pay the VAT on the project.
Banks involved in the project include Japan's SMBC , Bank of Tokyo-Mitsubishi, and Mizuho Bank, as well as local banks Banco de Chile, BCI and Banco Santander-Chile. Some local sources also indicated the participation of KfW-Ipex Bank.
EEC’s announcement comes ahead of another major power auction Chile’s National Energy Commission of Chile (CNE) is set to hold later this month, opening a tussle for a range of energy projects that will produce over 4.200 GWh of power across the country, annually.
They will follow a number of tenders finalised last August during Chile’s biggest energy auction to date, two-thirds of which were awarded to EEC’s competitors, Mainstream Renewable Power Ltd. and Empresa Nacional de Electricidad/Chile SA.
According to Chile’s president Michelle Bachelet, many of these ventures will require investment and bring huge benefits to the economy. “We are talking of about US$3bn in investment that will generate 3,000 new jobs”, she told members of the press in August.
Inflation in the 12 months to December was at mere 2.7% - lower end of the 2-4% target – and economic activity rose only by 0.8%, also below expectations. The slowdown in growth over the past year has had an impact on the Chilean credit environment.
“The reform agenda aims to address bottlenecks in human capital and social equity, but businesses have reacted negatively as the near-term implications for profitability, due to higher taxes and new labor laws, have overshadowed the potential long-term benefits,” Fitch said in its December report on Chile, downgrading outlook to Negative. “Progress on the energy agenda and micro-reforms could help, but their impact remains uncertain.”
But other economists are more optimistic, pointing to various exogenous factors – such as drop in the copper price.
“Chile has been one of the best performers in the region in recent years, and I think that some of the criticism has been unfounded. The various tax hikes introduced by the government have had only a limited impact on the businesses, which have been depressed mostly by the low copper price.”
Focussing on energy, Chile in recent years has become one of the global leaders in shifting towards renewables, with many of the energy projects based around wind and solar power. According to ACERA, Chile’s renewable energy association, deployment of renewable resources is expected to maintain a similar growth rate in 2017, with the government setting a target for renewables to provide 30% of all power generation in 2030 and 100% by 2050.
Investment related to the energy auction and lower prices could add as much as 2.5% to Chile’s potential GDP growth, Finance Minister Rodrigo Valdes claimed.
This drive towards sustainability, part of the current administration’s reform plan, has accelerated as a result of persistently deflated metal prices over the last two years, and huge gains in the efficiency of wind and solar power systems.
As a result, last summer’s tender saw some of the lowest prices on power in the world, with Bloomberg reporting that the Spanish solar-energy developer Solarpack Corp. Tecnologica had won a contract to sell power from a 120 megawatt-solar plant for merely US$29.1 per megawatt-hour.
Overall average price on these projects was down nearly 40% from 2015 – so cheap, in fact, that doubts began to emerge about their financing, with lenders potentially reluctant to take on that risk. This fear was exacerbated by slow completion of projects agreed the year earlier, with four of the five companies that won contracts at an earlier auction in 2015 having failed to meet the agreed deadlines.
Still, sources involved in financing these loans are not too concerned with delays, stating that excessive red tape, rather than any construction problems, are behind them.
“The main complications have been not so much in construction, as in the administrative and regulatory procedures in the lead up to these projects,” said a banker that works for an international lender overseeing the TEN loan.
“The construction and distribution companies sometimes struggle to quickly get approvals from authorities – sometimes because of local community protests, or simply due to red tape. But that all happens at a stage where it is not too late for the lenders to back down.”
According to the industry expert, the drop in copper prices over the past few years indirectly gave a boost to these energy auctions because, in the past, power companies were able to establish long-term PPAs with mining companies, now, with decrease in mining productivity, these distributers are now turning towards other projects, like renewables.
Looking at the financing structure seen in these deals, the source noted, most of them were project finance operations.
“Many are construction loans with tenors of 18 years or more, some were shorter tenor, up to eight years, with borrowers expected to refinance the loans at tenor maturity. There have been some project bonds, which are less common because they involve a much wider scope of investors as opposed to a handful of banks.”
The record low prices on projects with long-term maturities are, for some, is a source of concern: analysts questioned the accuracy of price growth models for renewables – namely, the assumption that the drop will continue over the long-term. But the banker insists those structures are sound.
“In terms of excess risk, banks are very thorough in researching and analysing price forecasts and models, they weigh up the risks and at the end of the day will only provide the financing if they are confident in the end result.”
But while the banking sector, as Fitch reported, has remained robust throughout the past year, with a “solid asset quality and capitalisation against the weak economic backdrop,” there are some concerns about rising corporate debt. It has grown steadily in the past 12 years, reaching nearly CHP90tn (US$134bn) end of this year.
“I think a lot of this borrowing we’ve been seeing in Chile and other Latin states is happening now because of the market anticipating less favourable conditions upon Trump’s inauguration,” said Edward Glossop of Capital Economics. “The Trump election will ‘dot some i’s’ in terms of the outlook for the rest of the year.”
The Trump factor, indeed, could put further pressure on Chile’s economy. Another source of uncertainty is the upcoming election, although Glossop does not foresee any radical policy shifts from an incoming administration, particularly regarding the long-term switch to renewable supplies.
Irrespective of global economic trends, Chile’s economy is in a strong position to deal with new challenges, the banker believes, not least due to high investment potential.
“Chile is a hugely attractive destination for foreign investors because it is the highest rated economy in the region. It has a high level of transparency and strong regulatory entities. Also, historically Chile has been a country with undersupply of energy, so there is a big opportunity for them to enter a growing market.”
