Under the program, the IDB will be the lender of record for the entire A and B loan facility. The IDB, Sumitomo and other participating banks in the syndication will share in the commercial risk of the operation. Pricing for both loans are based on market rates.
The A loan, to be denominated in yen for the first time since the IDB began this program, will mature in 10 years. The B portion, also in yen, will mature in eight years. The board of the IDB approved the financing yesterday. The IDB is the single biggest source of long-term financing for Latin America and the Caribbean.
Usiminas plans to use the facility to finance investments in a new power generation plant and related equipment in its new Santana do Paraiso plant in the Brazilian southeastern state of Minas Gerais. The new plant will produce electricity using excess heat and gases originated from the production of the steel, allowing the Belo Horizonte-based company to cut its production costs and reduce carbon emissions.
The A/B Loan program has allowed more than 100 international banks and institutional investors to provide more than $5.8 billion in some 58 transactions in Latin America and the Caribbean since the program began in 1995. Last year, closings for B loans shot up to $1.3 billion and are expected to reach at least $1.7 billion in 2008.
“Market conditions are very tight for Latin American companies and the IDB, through this program, can help investors mitigate certain risks and feel more comfortable in investing in the region,” said Jozef Henriquez, IDB’s syndication chief.
The IDB has preferential status granted by its borrowing member countries such as preferred access to foreign exchange, which reduces currency transfer and convertibility risk when companies have to service their debt with the bank. Outside the region, bank regulators in Europe and other member countries exempt B Lenders from setting aside country risk provisions.
The program allows companies to broaden their circle of lending beyond domestic markets, thus providing borrowers an opportunity to get better structures and terms from banks.
Sumitomo is primarily planning to tap banks and institutional investors in Japan because it is a market that has been relatively insulated from the turmoil in financial markets, said Henriquez. “It is the first time this class of investors will become the primary target for a B-loan,” he said.
The IDB’s Sustainable Energy and Climate Change Initiative (SECCI) will develop benchmarks of energy efficiency and emission reduction and provide Usiminas an energy balance, energy indicator and carbon footprint analysis.