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Brazil utilities lean on bonds to finance growth, reducing state role

By Luciano Costa

By Luciano Costa

SAO PAULO, Aug 26 (Reuters) - Brazilian power companies are raising a record amount of debt in local markets this year to finance construction of generation assets and transmission lines.

Tax-exempt local infrastructure bonds have been the main instrument to finance power investment in the country. Power companies have issued 12 billion reais ($2.9 billion) of the local bonds in the first seven months of the year, 83% of the total amount issued across all industries.

Banco Santander Brasil expects the power sector to represent around 80% of issuance this year. Tax-exempt infrastructure bond issuance may reach 30 billion reais ($7.3 billion) this year, Edson Ogawa, the bank's head of infrastructure financing, estimated.

The power sector may be Brazil's first to finance a larger amount of its projects through capital markets than through development banks such as BNDES.

"This was unthinkable six months ago", Ogawa added.

Local infrastructure bonds have reached 20-year maturities for transmission lines, an unusually long-term debt instrument for local Brazilian debt markets.

Among the examples of companies financing their expansion through capital markets are transmission company Tropicalia, controlled by funds managed by Banco BTG Pactual SA, state-controlled Centrais Eletricas de Minas Gerais- Cemig and transmission company Transmissora Alianca de Energia Eletrica, known as Taesa, and EDP Energias Brasil.

The shift to capital markets is in its early stages, and BNDES still has an important role in financing power companies.

Last year, BNDES underwrote 25.6 billion reais in power projects, higher than the 15.7 billion reais funded in the previous year, but far from the record 39.8 billion in 2012.

As benchmark interest rates in Brazil fall to their lowest level ever, however, and the development bank has reduced subsidies, the two alternatives have grown quite similar in cost, said Marcelo Girao, head of project financing at investment bank Itau BBA. (Reporting by Luciano Costa in Sao Paulo; Writing by Tatiana Bautzer; Editing by Tom Brown)