Directory of Innovative Financing: Argentina

Argentina

Project Title: YPF Structured Export Notes Private Placement

Project Title: Aguas Argentinas Concession

Project Title: Capital Market Development Loan

Project Title: YPF Structured Export Notes Private Placement 

Country: Argentina

Issue Amount: $400 million

Sector: Oil and gas

Status: Closed in June, 1995

Sponsors/Lead Manager: YPF, Argentina's major oil company that was privatized in 1993, with CS First Boston as adviser and placement agent.

Purchaser: U.S. institutional investors

Financing Package: Seven-year structured export notes with four-year average life.

Innovation: By securing the notes with a portion of future receivables to be generated under a long-term oil purchase agreement with the state-owned Chilean oil and gas company ENAP, CSFB was able to get its client an investment grade BBB rating from both Standard & Poor's and Duff & Phelps, which exceeded both the sovereign credit rating and YPF's own senior unsecured rating.

There were two keys to getting the increased credit rating: 1) reduction of performance risk though investment grade ENAP's strong take-or-pay contract and decision to pledge receivables into an offshore dollar trust; and 2) elimination of commodity price risk through YPF's decision to buy a hedging facility that protected itself against a potential fall in oil prices below a pre-agreed level. Those techniques allowed this transaction to raise important funds for YPF's ongoing operationalneeds in a post-Mexican peso crisis environment where commercial bank loans or public bond offerings were all but impossible to achieve. This was also the first time that an Argentine corporate had ever done a traditional U.S. private placement, and the first time one had exceeded the sovereign credit ceiling. It also allowed YPF to achieve financing at much lower rates than would have been possible from alternative sources at the time because of the "tequila effect" market disruptions.

Brief: YPF's $3 billion sale in 1993 remains the single largest privatization in Latin America. The momentum it built enabled the company to expand in new directions. In 1994, for example, it opened the $200 million Trans-Andean pipeline, which quickly allowed it to start providing nearly 40 percent of Chile's oil. Then in 1995 it purchased Maxus Oil Co. of the U.S.,thus expanding its international exploration and production capabilities.

Based on the success of this deal and the subsequent upturn in Latin American capital market conditions overall, YPF is now planning to launch an identical $400 million second issue in early November. That transaction, however, will be a fully registered public offering, with the resulting access to the broadest possible distribution likely to allow aggressive pricing for the borrower. Those notes carry an investment grade rating from Moody's as well as the other two rating agencies involved in the previous transaction.

Project Title: Aguas Argentinas Concession

Country: Argentina

Project Costs: Total costs over 30-year project lifetime estimated at $4 billion, beginning with a $380 million initial two-year phase

Sector: Water

Status: Closed November, 1994

Sponsors/Adviser: Aguas Argentinas SA, a consortium led by Lyonnaise des Eaux (France) with the following joint venture partners: Sociedad Comercial del Plata (Argentina); Meller SA (Argentina); Banco de Galicia y Buenos Aires SA (Argentina); SG de Aguas de Barcelona (Spain); and Anglian Water plc (UK). IFC later joined the consortium as an additional equity partner and arranged its commercial loan syndication led by Banque Nationale de Paris. BA Capital of Argentina and Lazard Freres of France advised Aguas Argentinas in the bidding process.

Customer: Commercial and residential users in the Buenos Aires metropolitan area (pop. 9 million).

Financing Package: $120 million in equity from the sponsor consortium and IFC, plus a $172.5 million long-term loan divided between the IFC and 15 commercial loan syndication partners. Of the debt portion, $38 million is in 10-year and 12-year tranches from the IFC and $134.5 million at 8-year maturities from 15 participating banks. Other terms of the package have not been disclosed. Internal cash generation and short-term debt covers the balance of the initial two-year phase of operations. The IFC has recently approved a $150 million debt and equity financing package for the project's $540 million investment needs over the next two years as well, but the loan has yet to be signed and no further details are available.

Innovation: This is the largest private water concession in history. The government made the award on an innovative no-cash basis, giving it to the consortium whose bid showed it could reach mandatory levels of increased service at the lowest proposed tariff.

Certain aspects of the concession agreement, however, posed substantial difficulty for potential lenders: ownership of the municipal water system remained in the government's hands, and concessionaire Aguas Argentinas had no assets to securitize to lenders and could not be replaced as operator.

IFC successfully created a security package within these constraints. Argentina's establishment of a new water regulatory regime was considered a key to raising the commercial debt.

Brief: As part of its multibillion-dollar privatization program, the Menem government decided to sell Obras Sanitarias de la Nacion, the Buenos Aires water utility whose service provision had fallen to disappointing levels because of low investment and poor management. The government decided to pass responsibility for providing water to its capital city on to a private concessionaire through international tender, but clearly stated that all future investment requirements would be the sole responsibility of the winning bidder. Before the tenders took place the government stipulated mandatory service improvements that the winner would have to make, but left it up to the bidders to determine how to finance them.

Aguas Argentina won the concession on Dec. 9, 1992 with a bid that cut average consumer water bills by 27 percent. It assumed management control a few months later and began working with the IFC to raise the necessary financing to improve service. Since then the company has begun operating profitably and is meeting all service increase targets. The company has lowered pollution levels in discharges to the Rio de la Plata and avoided water shortages in Buenos Aires for the first time in 15 years. It is estimated that as a result of this project 800,000 additional residents now have access to potable water, and that 120,000 more residents have sewerage services.

Project Title: Capital Market Development Loan

Country: Argentina

Project Cost: $500 million

Sector: Financial

Status: Effective August, 1995

Sponsor/Adviser: World Bank, with Salomon Bros. acting as adviser to a Backstop Fund for bond issues by private Argentine commercial banks that will be maintained by the government-owned Banco de Inversion y Comercio Exterior (BICE) in Buenos Aires.

Bondholders: Argentine and international institutional investors.

Financing Package: The World Bank has approved a $500 million loan to Argentina that will serve as a contingency support facility for the Backstop Fund. Loan proceeds can be drawn down when private Argentine banks exercise their put options to sell bonds to the Backstop Fund, which could occur in the event of serious market disruptions raising spreads substantially over LIBOR. The decision to trigger use of the Backstop Fund is left up to the banks, so long as they maintain domestic credit ratings of BBB or above at time of exercising the option.

Innovation: The assurance of World Bank funding if necessary helps leading Argentine banks extend the maturities of their loans to corporate borrowers by ensuring that they themselves will have continued access to long-term funding. This is also a break with usual practice at the World Bank in that the decision to access the funds will not be made by the government but by private banks in accordance with market conditions. Salomon Brothers, the financial adviser to the fund, has developed a Chicago Board of Trade-style pricing matrix for the options, whose auctions were set to begin in late September. Proceeds of the auctions will pay Argentina's 25 bp commitment fee ensuring access to the World Bank funds if necessary, which can be released to individual banks in individual allocations of no more than US$50 million at a time.

Brief: Having authorized creation of its first private pension funds in 1994, Argentina is in need of high-quality long-term debt instruments, which are considered a key to expanding its recent financing of private enterprise and infrastructure. The World Bank intends to support this process by helping the prime-rated private Argentine commercial banks issue bonds at longer maturities than are currently possible and thus be able to extend the maturities of their own loans. The World Bank foresees Argentine banks issuing 3-7 year bonds and rolling them over for another 3-7 years on maturity, but is supporting the BICE Backstop Fund in the event that local conditions deteriorate to the point that such extensions are temporarily impossible. In that case, the backstop fund will purchase new bonds to guarantee that the markets provide sufficient continued liquidity for the banks to continue lending long-term.

Infrastructure and Financial Markets Division
Private Enterprise and Financial Markets Subdepartment
Sustainable Development Department
Inter-American Development Bank

Last updated: 02/26/07