Directory of Innovative Financing: Mexico

Mexico

Project Title: Apasco Asset-Backed Securities Offering

Project Title: Mexico City-Toluca Toll Road

Project Title: Chihuahua Norte Municipal Wastewater Treatment Plant

Project Title: Met-Mex Penoles, S.A. de C.V. Secured Export Note Private Placement

Project Title: Tribasa Toll Road Trust Rule 144a Bond Offering

Project Title: Apasco Asset-Backed Securities Offering

Country: Mexico

Project Costs: $100 million

Sector: Construction

Status: Closed July, 1995

Sponsors/Lead Manager: IFC, with Swiss Bank Corp. and Banamex acting as placement agents.

Customer: Apasco S.A. de C.V., Mexico's second-largest cement producer with total installed capacity of 7.8 million tons a year of cement.

Financing Package: $100 million loan, of which the IFC retained $15 million for its account and sold $85 million to a special-purpose trust based in Wilmington, Del. that then repackaged the loan in the form of long-term investment grade securities sold to US institutional investors. The 12-year

securities were priced at a fixed rate of 9% (equivalent to LIBOR plus 285 basis points). By comparison, the two-year $300 million June, 1995 Bancomext bond issue that marked the first return of sovereign Mexican debt to the markets since the peso crisis, priced at 500 bp over six-month LIBOR.

Innovation: IFC involvement provided comfort to target purchasers, allowing this transaction to represent both the first long-term debt securities issued by a Mexican corporate since the peso crisis and the first time US institutional investors have cofinanced an IFC loan. The 12-year maturity was seen as a major accomplishment, given the negative perception of Mexico in the markets during the first seven months of 1995. The IFC is interested in replicating this model elsewhere, as long maturities of this kind are also especially appropriate to emerging market infrastructure projects, which have been restricted due to the unavailability of true long-term financing.

Brief: Apasco, a Mexican blue-chip with ADRs listed on the NASDAQ in New York, is rated BB by Standard and Poor's and had issued medium-term debt in the Euromarkets as recently as 1993. But despite the strength of its balance sheet, country risk perceptions hindered it and other leading Mexican corporates from returning to the markets after the peso crisis.

Intent on completing a $154 million expansion program, Apasco retained the IFC earlier this year to set a conservative strategy for obtaining long-term debt financing. The IFC initially provided a $100 million, 12-year loan in July 1995, and concurrently sold an $85 million participation to the Delaware special purpose trust. Simultaneously the trust issued $85 million in 12-year asset backed securities that were ranked BBB+ by S&P's - a higher rating than either Apasco or sovereign Mexican debt carries. The rating agency assigned investment grade status because of the participation of the IFC, which has a sound 40-year record of lending exclusively to emerging market corporates and is often perceived to have preferred creditor status. Once the rating was secured, four leading US insurance companies (Prudential Insurance Co., John Hancock Mutual Life Insurance Co., Northwestern Mutual Life Insurance Co., and Sun America Co.) bought the securities, considering them appropriate for their own long-term liabilities. The transaction thus developed a new financing structure that enabled an emerging market corporate to access the US institutional private placement debt market by superseding its country's below-investment grade rating. Usually the rating agencies refuse to rate companies higher than their respective countries. The deal is considered to have opened up a new pool of lenders for private emerging market borrowers beyond commercial banks.

Project Title: Mexico City-Toluca Toll Road

Country: Mexico

Project Costs: $300 million

Sector: Transport

Status: Bond successfully placed in 1992

Sponsors/Lead Manager: A trust administered by the Mexican Development Bank was set up to issue the securities and collect toll road revenues. Lehman Brothers and IFC co-lead managed its international bond offering.

Customer: Grupo Tribasa, a leading Mexican construction company that is the owner and operator of the toll road.

Financing Package: $300 million was raised for the Mexican trust both in domestic and international bond markets. $200 million of fixed-rate, 10-year-Eurobonds were underwritten by Lehman Brothers and the IFC, with IFC purchasing $10 million of this issue for its own account, and the rest sold to international investors. $100 million equivalent in peso-denominated 10 year-public bonds were underwritten in the Mexican market by a local syndicate. The bonds were secured by an assignment of the toll road revenues.

Innovation: This was the first financing of a Mexican toll road in the international capital markets, and was intended to set a precedent for future toll road financing in Mexico. This method of financing, however, was considered to have been possible largely because the toll road was already operating, which implied considerably less risk than a greenfield project.

"In connection with this transaction, an innovation which is generally being considered for infrastructure finance is the provision of debt finance by banks during the early, more risky years of a project (including construction), followed by refinancing with longer-term, securitized debt once the project is completed," the IFC has written. "This means that the limited maturity of bank debts does not constrain project financing: bond markets can cope more easily with maturities of ten years or more. The swap into bonds or other securities after the project's completion also enables commercial bank funds to be recycled into new securities more quickly."

Brief: The Toluca Toll Road is a 22km six-lane expressway which serves the eastern leg of a 40km route between Mexico City and Toluca, a major industrial center. Grupo Tribasa needed the $300 million to a) repay outstanding short-term construction debt; b) to pay the state for an extension to the concession; and c) to develop other toll roads in the same region.

Project Title: Chihuahua Norte Municipal Wastewater Treatment Plant

Country: Mexico

Project Cost: $17 million

Sector: Water

Status: Limited-recourse project finance loan closed in June, 1994; project began operations in January, 1995.

Sponsor/Adviser: Atlatec, a unit of Mexican environmental services company Grupo Empresarial de Mejoramiento Ambiental (GEMA), with a group of Chihuahua private investors as cosponsors; Chase Manhattan Bank was the financial adviser. GEMA is a subsidiary of CYDSA, a large Mexican conglomerate whose other business lines include textiles, chemicals, and packaging.

Purchaser: Municipality of Chihuahua, under a 10-year service contract.

Financing Package: The sponsor developed the project under a 10-year BOO contract with the municipality under a pre-arranged tariff schedule indexed to inflation. Chase provided a $9 million 8.5-year loan at interest rates that have not been disclosed. The municipality made a $5.4 million-equivalent peso grant, and the remaining $2.6 million-equivalent came in peso equity from GEMA and the local investors.

Innovation: This is the first limited recourse project financing of an environmental project in Latin America, and has been structured in a way that makes it off-balance sheet to both the sponsor and the municipality. It contains several innovations.

Indexing the newly-formed project company's revenues to inflation has alleviated foreign exchange risk, and the peso devaluation has thus far not affected the project's ability to meet the dollar repayment schedule.

The operating contract's provisions set agreed standards for the volumes and dirtiness of the water that the plant could treat. But like all Mexican cities, the offtaking municipality of Chihuahua had never undergone a credit rating, causing lender Chase to bolster it with an extra layer of financial support. For this Chase turned to the Mexican development bank BANOBRAS.

BANOBRAS provided an irrevocable and replenishable contingent line of credit guaranteeing payment and all other obligations by the municipality in the event of shortfall. That line of credit will then allow the municipality to pay the project company if necessary. If the credit is drawn upon, BANOBRAS will look to tax receipts in the state of Chihuahua to cover its disbursements.

Brief: The privatization of water treatment in Mexico began in 1992, when cities began approaching the private sector on owning, constructing and operating facilities for the first time. Chihuahua was one of the first cities to seek bids that year, requiring winners to bring their own financing.

Chase, a longtime player in Mexico, began working with the GEMA team as soon as it won the award. By creating a model that was financable, it has now set a precedent that other Latin American water treatment projects may follow. But given the financial uncertainty of many municipal governments, an extra layer of support such as the BANOBRAS line of credit may be necessary. Other countries such as Brazil that have strong national development banks thus are considered natural candidates for this kind of structure.

In the future, however, water project sponsors' service contract terms may lengthen. That could cause them to seek longer-term financing in the international capital markets than commercial banks could offer. Such transactions would likely require large industrial waste-water projects of $50 million or more with a strong corporate offtaker well-known to the markets, not merely a municipality.

Project Title: Met-Mex Penoles, S.A. de C.V. Secured Export Note Private Placement

Country: Mexico

Issue Amount: $100 million

Sector: Mining

Status: Closed in December, 1993

Sponsors/Lead Manager: Met-Mex Penoles, S.A. de C.V., a wholly-owned subsidiary of Industrias Penoles S.A. de C.V. and the largest producer of refined silver in Mexico; CS First Boston was adviser and placement agent.

Purchaser: US institutional investors.

Financing Package: Five-year secured export notes with 2.5-year average life; pricing information was not disclosed.

Innovation: By securing the notes with a portion of future receivables to be generated under a long-term purchase agreement with Sumitomo Corp. of Japan, CSFB was able to obtain an investment grade Baa3 rating from Moody's, which exceeded both the sovereign credit rating and Penoles's own senior unsecured rating from Moody's.

There were two keys to getting the increased credit rating:

1) reduction of performance risk though AA-rated Sumitomo's strong take-or-pay contract and decision to pledge future receivables into an offshore dollar revenue collection account; and 2) elimination of commodity price risk through Sumitomo's commitment to buy sufficient silver at market prices to allow Penoles to meet its debt service obligations.

Those techniques allowed this transaction to raise low cost funds for Penoles' expansion of its smelting capacity in Mexico at a time when commercial bank loans or public bond offerings were available, but were very expensive.

Brief: Although a straight corporate financing that funded Penoles' general capital expenditure program and had recourse to the sponsor, this transaction did involve a number of project finance techniques. Given how expensive its alternative sources of finance were at the time, this transaction provided Penoles with the flexibility, cost savings, and ease of execution provided by a private placement in the US bond markets.

The key was obtaining the investment grade credit rating, through Sumitomo's pledge of purchasing a small portion of the company's output of refined silver.

Project Title: Tribasa Toll Road Trust Rule 144a Bond Offering

Country: Mexico

Issue Amount: $110 million

Sector: Transport

Status: Successfully placed in November, 1993

Sponsors/Lead Manager: Grupo Tribasa, a leading Mexican construction company; Salomon Brothers was lead manager.

Purchaser: US institutional investors.

Financing Package: Unrated $110 million, 10.5% (500 bp over Treasuries) 12-year notes with an 8.5-year average life.

Innovation: Coming a year after the same sponsor's precedent-setting Toluca toll road trust offering, this deal further refined the concept of a 144a bond securitized by a Mexican toll road's peso-denominated revenues. Only one other project in the government's ambitious $14 billion, 6,000km toll road programs has since been refinanced in the international capital markets in this way, and an inability to meet the government's over-optimistic traffic flow projections have left most other concessionaires under high short-term debt burdens. Estimates are that 60% of Mexican banks' highway construction loans were nonperforming by the end of 1994, and banks have been forced to capitalize many unreceived interest payments.

One of the innovations that allowed the Tribasa bonds to sell was its use of an offshore debt reserve fund domiciled in the US with minimum reserve balances maintained by the sponsor designed to cushion investors against peso devaluation. Failure to pay principal at final maturity will not be interpreted as a default, but as an event triggering a late payment premium of 1% per annum to be paid strictly from funds remaining after payment of all principal and interest due under the amortization schedule.

Brief: This transaction securitized two Tribasa toll road projects that opened in 1991, Ecatepec-Piramides (22.2km, just north and east of Mexico City) and Ameria-Manzanillo (47km, on the Pacific coast in Colima state). The sponsor used the proceeds to repay its concession companies' indebtedness incurred in the construction of those toll roads and for other general corporate purposes.

The notes were not an obligation of Tribasa itself. That firm clearly stated in the offering memorandum that 1) the tolls being charged for these roads were "substantially higher" than at comparable projects in the US and Western Europe; and 2) that there was "no assurance" that the traffic volume projections used to calculate the revenue streams needed to repay the bonds would "prove to be correct, or that the effects of all these assumptions, even if correct, will be the same as those projections."

Following the Tribasa trust offering, Lehman Brothers successfully sold a third toll road-backed securitization in the international capital markets, a $265 million, 9.25% (443 bp over Treasuries) 10-year amortization/5 year average life bond for the 30 year-old, government-build Mexico City-Cuernavaca toll road.

Chemical Bank released a research report earlier this year indicating that the toll road projects that Tribasa financed in the US capital markets were in the best financial condition of the many in its portfolio. But the two large interstate concessions it operates in partnership with Grupo ICA and Grupo Mexicano de Desarollo, Curenavaca-Acapulco and Mexico City- Guadalajara, are currently providing less than 20% of debt service from operating income, the Chemical report said.

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

Last updated: 02/26/07