Phillip Fletcher and Alexis Sáinz from Milbank Tweed Hadley & McCloy speak with Kurt Stumpo about the Providencia 60MW photovoltaic power plant in El Salvador and broader trends in Central American energy markets
How did your firm win this mandate?
Fletcher: We are the correspondent law firm for a Paris firm called DePardieu Brocas Maffei, it’s one of the leading firms in Paris. They’ve been a longstanding correspondent firm with ours, and they are longstanding Neoen [the project developer] counsel. Neoen’s a French company. We were originally called to handle some New York law aspects, but because it was important to be able to combine Spanish-speaking experience, renewables experience, Latin American experience and development finance experience, we were retained to handle the bulk of the deal.
Moving to the financing of the project, were there any distinctive or novel features?
Fletcher: The financing is always interesting when you put development finance institutions together with three different pieces of [the deal] here, with the IDB [Inter-American Development Bank], the Canadian [Climate Change] fund and Proparco. They each have institutional requirements, so navigating that is complicated. The magic of the thing, really, was the first-in-country type issues, trying to put together bankable packages on a basis of a series of PPAs, which were not really designed entirely with finance in mind. The negotiation of direct agreements with them and making necessary amendments to the PPAs - bearing in mind that with a series of PPAs you have a number of smaller obligations from the off-takers - took some time. That’s really no different than what we see trying to do first-in-country power purchase arrangements in really any country in the world.
Sáinz: I think that’s absolutely right. There were in total eight offtakers here, seven for the first solar farm and another for the second solar farm, and getting those parties comfortable with what would be required in a multilateral financing took some time, but we eventually did get there.
You touched on this earlier, but what’s the biggest difference when you’re dealing with entities like the Inter-American Development Bank or the Canadian Climate Change Fund versus a commercial lender?
Fletcher: There’s good and bad with everything. The good news is that the basic proposition of doing a deal in an emerging market is something that they [development institutions] can handle, so doing a deal in El Salvador, which is an emerging market with its history, is something that is not easy for commercial lenders to do but is something that is well within the ability of these institutions with their development objectives.
What’s complicated - although the differences are perhaps getting narrower - are the policy issues that come to fore with development institutions, the focuses on environmental and social issues and various kinds of covenant controls. Generally speaking, the covenant package for multilaterals is tighter than it is for commercial banks... but they generally are a tighter fit. So for a developer who may be used to dealing with commercial banks to deal with a multilateral takes some getting used to. They’re very diligent and very thoughtful and very focused on ensuring that the package is as strong as possible. At the same time, against that backdrop of complexity, they’re accepting that basic country risk, so there’s huge benefits to dealing with them, but to satisfy them takes a bit more thought.
Sáinz: And I would say here, in particular, IDB and IIC [Inter-American Investment Corporation] were very engaged with the questions of country risk, so they were more comfortable having direct conversations with their local counsel and really getting into the weeds of what the issues might be and getting comfortable with the fact that it hadn’t been done before.
Sometimes it takes a bit longer, but IDB and IIC were much more comfortable with some of those unknowns and becoming familiar with those unknowns and working with local counsel to develop a path forward.
Fletcher: And they even engaged directly with the power purchasers, so they’re very proactive and willing to get involved in-country for this kind of project.
What made El Salvador appealing in the first place for this kind of project?
Sáinz: They did their first auction and have now done a second one, and they need power.
Given that this was the first solar project in El Salvador history, were there challenges in terms of there being an adequate regulatory framework in place? Was there a lot of guesswork?
Sáinz: They had to engage closely, for instance on interconnection on the PPAs that Phil described. Just even what should those PPAs look like, what are the basic terms that would be financeable? For the regulatory framework, there wasn’t a ton that had to be done there, but before Neoen even went to IDB and IIC they did have to work closely in-country, they had to manage a lot of those kinds of issues early on.
Were those the biggest challenges that you faced, or were there others that were more difficult to overcome?
Fletcher: I’m not sure if it was more difficult, but there hadn’t been a lot of security packages put in place in El Salvador, so creating security packages that met standards of bankability required a little bit of finesse.
If you could take me through that, what did that finesse require?
Sáinz: The basic issues were how do you assign a contract; what are the requirements, in this particular case for a regulated industry; how do you structure a trust? In the weeds types of questions.
Coming away from this project, did it seem to provide any lessons on future projects in El Salvador or the region more generally?
Sáinz: I expect that the lessons learned were the types of things we were just discussing, basically the nitty gritty legal issues, will make this second process a little easier in El Salvador.
Flethcher: By and large, there’s a lot of renewables activity across all of Latin America. You can start at the bottom with Chile, a lot of discussion about Argentina, and it really goes up through Mexico. We are seeing utilities and power purchasers learning how to put out tender processes that have been very competitively bid, so they’re attracting very attractive pricing and proposals.
There is a strong interest in the lending community in supporting those projects. Depending on the jurisdiction, the mix between commercial
lenders and development financial institutions may vary, with El Salvador at least for the time being more of a development finance market and Chile being quite open to commercial banks, for example. Milbank has long been active in this market and in Latin America generally, and we’ve been active in the renewables space, both solar and wind, for a long time, so the fact that the region’s been active in these areas has been terrific for us. We’ve got lawyers across the firm active in the area.
Sáinz: Also, with the renewed interest in Central America in particular with renewables, a hands-on approach will certainly be required going forward, as it was in this case in El Salvador. Developers like Neoen who are interested in really doing their homework and being on the ground and understanding country risk is critical. In terms of Milbank, that’s one of our strengths, being on the ground, being hands-on and really understanding the issues and finding resolutions where it may appear at first there are none.
FURTHER INFORMATION
Providencia 60MW photovoltaic power plant
This deal record is from the IFLR1000 Deal Data product.