Private Enterprise and Financial Markets > Infrastructure and Financial Markets > Infrastructure
Infrastructure Finance Directory 1998
By Antonio Vives (02/98, IFM98-114, En)
Presentation
This Directory, the third one published, describes some of the most significant infrastructure finance transactions of 1997. It does not attempt to be comprehensive and includes only those deals that have a demonstration effect. Even though we include deals from countries in Africa, Asia and Europe, the goal is to present as many cases as possible from Latin America and the Caribbean. The major users of this report are anticipated to be the officers and managers of the Inter-American Development Bank Group (IADB Group), and officers, sponsors and investors in the region. Nevertheless, the Directory is expected to be of help to other bilateral and multilateral institutions and sponsors, developers and financiers of private infrastructure.
The Directory includes all private infrastructure projects financed by the Inter-American Development Bank and the Inter-American Investment Corporation during the year, as well as other trend-setting transactions. Project descriptions emphasize those special aspects, hoping to stimulate the search for more creative and effective financing structures, and a better understanding of the conditions that make a given financial instrument or structure possible. This issue includes 30 transactions, 23 of which involve Latin America and 10 of those financed by the IADB Group. All but 2 are from emerging markets. While most infrastructure subsectors are included in the Directory, the bias is toward power, transportation and water, which are the main sectors covered by the IDB Group. Among the projects described are 18 greenfield projects, 4 privatizations and 8 refinancings. In terms of markets, of the 16 greenfield projects in emerging markets, 6 went to the capital markets with bonds. As the purpose of this Directory is to present financing examples, this variety of countries and modalities allows for an overview of the many different instruments and structures.
Even though more transactions occurred in Latin America, the ones presented here provide a good sample from which to infer the financing trends. Overall, there seems to have been a drop in the number of projects as compared to 1996, which was a peak year since private infrastructure took off. Nevertheless, the relative participation of Latin America among emerging nations seems to have grown, a trend that was evident even before the East Asian financial crisis. Furthermore, there are a number of transaction in the region that are trend setting and indicate the continued confidence of investors: the first ever guarantee issued by a multilateral institution to a private project, without government counter guarantee, took place in one of the most complex sectors, sanitation, and was granted to a subnational government project, the Rio Bogota Wastewater Treatment Plant (known in international circles as Salitre); two greenfield projects received bond ratings above those of the sovereign, both investment grade, Petrozuata in Venezuela on account of strong sponsors and products, and Rio Bogota (Salitre) in Colombia supported by and IDB guarantee. Another one, Termoemcali in Colombia received an investment grade rating in an investment grade country; at least two merchant plants, one in Argentina and one in Colombia, were financed, reflecting the maturity of electricity markets in those countries and the willingness of the sponsors to take on commercial risks. In the case of Colombia, it was done completely with commercial bank lending, without any government guarantees or bilateral or multilateral participation; even after the relatively negative experience of some toll roads in the region, quite a few new ones closed in 1997. This Directory lists five in Latin America, four greenfield and one refinancing, and one of each type went to the bond capital markets, without multilateral cover (it also lists others in China, as they provide interesting examples of capital market finance); eleven of the listed operations (five of which are greenfield) had access to the capital markets, including one international equity operation for a public utility with majority holding by a subnational government, and one with significant placement in local capital markets; there is clearly an increasing appetite in the United States high-yield bond market for emerging markets project and corporate bonds placed by local companies specializing in infrastructure. This market can be an abundant source of long term debt, although, depending on the strengths and weaknesses of the credit it can carry high borrowing costs, restrictive covenants and increase the foreign exchange risk exposure; nineteen ninety-seven also saw the long awaited opening of the Brazilian power market, the largest in Latin America. Some independent power producers closed deals in Brazil, and there was significant activity in the privatization of distribution companies. Prices paid were well above expectations.
As these examples highlight, significant progress has been made in diversifying the sources and financing instruments, as well as in reducing the reliance on government and bilateral or multilateral guarantees. Yet, the fact remains that most sources of private finance continue to be foreign bank loans with some sort of public cover. This progress may be partially undone as a result of the East Asia crisis, as is described below. The crisis in East Asia has had, and will continue to have, an impact on private infrastructure financing in Latin America and the Caribbean, both with respect to quantity and terms. The most immediate effect has been a renewed interest in the region, and an appreciation of the reforms that most countries put in place in the late eighties and early nineties, that allowed them to overcome their own crises and those of other continents without major consequences. It is expected that over the long run, the region may benefit from the East Asian crisis. An indication of this is the fact that prices paid for the privatization of electricity distribution systems in Brazil were well above initial expectations, even after the onset of the crisis. This opening of Brazilian infrastructure markets, expected to continue during 1998, will be a powerful magnet for attracting investments to the region.
There are several other factors that lead one to believe that private infrastructure finance may not be seriously affected. One is the fact that although Latin Americas's needs for infrastructure investment is related to growth as East Asia is, they are of a more urgent nature (comparatively less efficient, although with better coverage, more privatizations). Another factor is that the increased volatility in developed country financial markets that resulted from the crisis makes Latin American markets look relatively more attractive than before. In addition, given the relatively large returns offered by infrastructure investment, investors may look to them as an alternative in portfolio diversification strategies, either via direct equity funds, American Depositary Receipts, publicly registered bonds, rule 144a issues, high-yield mutual bond funds, private placements or other instruments. On the negative side, there is the continued perception on the part of many investors that all "emerging" markets are the same, and the resulting tendency to assume that they are all risky. Nevertheless, there is some evidence that this may be changing. For instance, foreign direct investment in the five countries of East Asia hit by the crisis dropped from US$93 billion in 1996 to an outflow of US$12 billion in 1997, while in Latin America and Caribbean foreign direct investment increased from US$35 billion to over US$50 billion.
Another important effect of the crisis in East Asia is the realization that some risks that were considered minor have gained importance. An example is the possibility of cancellation or postponement of projects and the foreign exchange exposure typical of infrastructure projects. This will cause a return to the demand for government or multilateral guarantees for many risks that the private sector had been starting to absorb. It will also force a more creative search for local currency finance. Given that most projects in Latin America were relying on external bank debt for financing, it is to be expected that increased risk perceptions will lead to wider spreads, although this may also be the results of those spreads being very narrow as a result of significant competition among bankers to place their liquid holdings. In terms of access to capital markets, a postponement is to be expected until thing settle, although we do not expect a significant drop in activity over the medium term.
On the whole, we expect that private infrastructure investment, which has a long gestation period, will not diminish noticeably in Latin America and the Caribbean during 1998, but that investors and lenders will become more demanding in terms of risk mitigation and the cost of funds, It is hoped that this seemingly negative situation will contribute to the much needed development of local capital markets.
Antonio Vives Deputy Manager Sustainable Development Department January 1998
Last updated: 01/29/07
