Sole lead arranger WestLB closed a unique US$320mn hybrid financing raised for Bahia Pulp in Brazil in January 2007. This deal stands out in the market due to its interesting structure that incorporates elements of project and corporate finance, but is also based on a future flow export receivables securitisation.

The transaction also supports the production of an unusual product. The borrower Bahia Pulp is set to become one of the lowest cost producers of dissolving pulp, a product used in the textile and food industries, but also is used in the manufacturing of pharmaceuticals and cigarette filters.

Asides from the deal structure, the facility also highlights wider trends, most specifically the increasing level of large-scale Asian direct investment in Latin America. Brazilian-based Bahia Pulp is owned by China’s Sateri International, a leading global manufacturer of viscose and dissolving pulp.

Proceeds from the financing will support the expansion of Bahia Pulp’s dissolving pulp plant in Brazil. The intention is to expand the production capacity from 115,000 tons to 365,000 tons per year by 2008.

The hybrid nature of the deal structure helped WestLB secure the mandate, as competing banks tended to offer more traditional propositions involving project financing or bond structures with full recourse to the parent company.

The deal had other appeals as well, remarks Oliver Langel, executive director of WestLB Capital Markets in Latin America: “Through this transaction, we were actually able to open up a whole new world of lenders. One of the reasons that the borrower chose us, was our ability to introduce the company to a range of new investors.”

The Brazilian market is typically segregated into traditional project finance, capital markets and commercial banks, however this hybrid deal brings in both corporate finance players as well as institutional players looking for a deal with strong project finance elements.

In total 14 investors participated in the transaction, with all participants enjoying the added security of WestLB’s commitment to disburse the total amount of financing before a successful sell-down. Lenders included infrastructure funds, alternative investment funds as well as multilateral agencies.

WestLB sought to create a tailor-made transaction based on the company’s ongoing and future project commercial operations. Parent support is provided when needed and only within the construction phase. WestLB also provided the client with a US$200mn currency hedge, reducing the project’s currency exposure and increasing the bank’s return in the transaction.

“With this deal we were able to offer an interesting hybrid transaction. We were able to incorporate certain project financing elements when they were needed, especially during the construction phase. Once this phase is over, most of these additional structural enhancements fall away, and the deal becomes essentially a corporate financing. With this structure, the borrower doesn’t necessarily need to refinance the facility post-construction,” explains Langel.

He adds: “A project financing would typically require long-term offtake contracts to be in place. Yet, given the nature of the product and the group’s track record in Asia, we didn’t need long-term contracts, but were able to define criteria for a basket of eligible offtakers.

“A lot of the banks competing for the mandate were offering typical project financing structures, which were thought by the borrower to be too heavy to implement.”

Deal Information:




Bahia Pulp
Amount: US$320mn
Sole mandated lead arranger: WestLB
Arrangers: Banco Espirito Santo; Nordic Investment Bank; TCW Global Project Fund II
Tenor: 10.5 years
Law firms: Mayer Brown Rowe & Maw (lender’s counsel in US); Cleary Gottlieb Steen & Hamilton (lender’s counsel in Brazil and borrower’s counsel in US); Machado, Meyer, Sendacz e Opice (borrower’s counsel in Brazil); Johnson Stokes & Master
(Hong Kong counsel); Walkers (Cayman counsel)
Date signed: January 2007