Proximo Weekly: The private placement sweet spot in Latin PPP
Large institutional debt providers are increasingly driving deal structures in Latin American infrastructure – and as Costanera Sur recently demonstrated, the trend is not restricted to the major regional project markets.
In one small respect, the Costanera Sur road project, which reached financial close in early August, was something of a step backwards in the evolution of the project finance market in Paraguay. The country’s $738 million Rutas del Este 2 and 7 concession was structured as a public-private partnership, and financed in October 2019 using a Rule 144A bond issue. But Costanera Sur was structured as a more straightforward public works contract, falling under Law 5,074 (a turnkey contract which allows the state to transfer responsibility for the work, financing and construction risk to the contractor) and harks back to the $778 million Bioceanico deal, a 144A issue that closed in July 2019.
PPPs and public works contracts in Paraguay have roughly analogous payment regimes, with each relying on payment certificates. Under a Paraguayan PPP contract, a project company receives Pagos Diferidos por Inversion (PDIs), whereas public works contractors receive Certificados de Reconocimiento de Obligacion de Pago (CROPs) from the Ministry of Public Works and Communications. Both are unconditional, irrevocable obligations that look a lot like, but are not explicitly defined as, public debt. Similar structures have been the mainstay of infrastructure finance in Latin America for over 15 years.
Costanera Sur, whose sponsors are Spain’s Eurofinsa and local construction firm Ingenieria de Topografia y Caminos (T&C), is something of a holdover. It was awarded in October 2019, with the financing experiencing some delays in closing. With a $130 million capex cost, it also falls somewhere in size between the two large 144A-funded projects already mentioned, and the sub-$50 million public works contracts that have a lower external debt requirement.
Costanera Sur involves building a 7.6km road between Paraguay’s capital Asuncion and the district of Lambare, to the city’s south. Its working capital facility requirement of $40 million has been met from local banks – Banco Itau, Banco Familiar, Banco Regional and Sudameris Bank – but the bulk of the financing comprises a $130 million private placement to Banco Itau, which structured the financing, as well as KfW IPEX-Bank and MetLife.
So Paraguay’s third offshore transport financing, and second public works contract financing, is also its first private placement deal. It is also a first for KfW, which has been attached to novel debt structures in the region before – most notably the GNA LNG-to-power project in Brazil, on which it guaranteed a loan from BNDES.
Given the size of the deal, and the presence of MetLife, the private placement structure made a lot of sense. Like the 144a bonds, the payment certificates are bought by a Cayman Islands-registered issuer. The private placement also provides some benefits in terms of allowing for a delayed draw component, which mitigates some of the inefficiencies from funding with bond proceeds and leaving them on deposit until CROPs are issued. KfW had a requirement to fund on a fixed schedule, but this could be accommodated in the construction and financing schedule.
Most recent discussion of the growth in private placements in the region has centred on the liquidity of the large institutional lenders active in the region, and the improved terms that they can offer the right sponsors and projects. But Costanera is a slightly different, older, story. It’s a small deal, funded by a small knowledgeable group of lenders in a less developed market, where delayed draw can offer some real benefits. Other decently rated but small and infrequent PPP grantors might find this funding route very convenient.
Selected news articles from Proximo last week
The Port Authority of New York and New Jersey has announced the shortlisted consortiums for the AirTrain LaGuardia airport rail link in New York, USA.
The Spanish government has announced a tender for 3.3 GW of renewable energy capacity.
HyperOne – the A$1.5 billion ($1.15 billion) Australian hyperscale fibre project launched by Australian tech entrepreneur Bev Slattery – is calling for formal expressions of interest in undertaking various elements of the project and the full end-to-end scope of the design, construction and maintenance of the fibre network.
MIDDLE EAST & AFRICA
ACWA Power has reached financial close on the SAR3.4 billion ($910 million) 1500MW Sudair Solar PV project in Saudi – the first project under the Public Investment Fund’s (PIF) renewable energy programme which is expected to deliver 70% of Saudi’s renewable energy under the National Renewable Energy Program (NREP).
Brazil’s Agencia Nacional de Transportes Terrestres (ANTT) is to auction a 30-year concession (plus five-year extension option) for the stretch of BR-116 that connects the cities of Sao Paulo and Rio de Janeiro – also known as the Via Dutra – and the BR-101, between the municipalities of Rio de Janeiro and Ubatuba, on October 29.
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