Latin Finance - January/February 2012 - 49

ways. Never before had Mexicans created an infrastructure bond that securitized assets that had yet to be built. It was the ﬁrst such project bond to be issued in the country, with optimists seeing a whole new asset class, and it was also the ﬁrst instance of local institutional investors putting their money into a penitentiarybuilding venture.

letter of credit issued by HSBC that covers as much as 5% in cost overruns. For those who seek more government participation in large infrastructure ventures in Latin America, the ICA project ﬁnance venture is an example of a private sector, built, operated and ﬁnanced venture of a project previously left to governments. Bankers expect similar structures to come to market over the next year in Mexico. The future of private-sector led infrastructure ventures in the region will largely rely on the ﬂexibility that governments o er to private companies in the infrastructure business. LF

OOG’s $1.5bn 6.35% 2021

Project Financing

Paving the Way
ICA builds new project structure The bond came in two tranches: a ﬁxed-rate 5.32 billion peso ($425 million), bond paying a 10.1% coupon with quarterly amortizations starting in the second year, and an inﬂation-linked 1.78 billion peso tranche paying a 5.65% coupon. HSBC, BBVA Bancomer and Banamex managed the transaction. A key piece of the non-recourse debt deal was ICA’s 22-year services agreement with the government to run both penitentiaries following their completion. The company expects to receive a stream of pre-set inﬂation-protected payments every month during the two-decade period that would cover the payment of the bonds and reward ICA for its services. Unlike other self-sustaining infrastructure ventures such as toll roads, a prison bond lacks any cash ﬂows directly related to the jail’s operations and so the contract the issuer had with the government, was key. The structure of the deal helps mitigate execution risks that come with construction projects through a stand-by debrecht Oil & Gas’s $1.5 billion senior secured 6.35% 2021 bond may not have been the region’s ﬁrst drillship bond, but it is certainly the largest and the one that became a template for other project bonds to follow. Designed to take out the loan that initially ﬁnanced the building of the Norbe VIII and IX deepwater drillships, the bond essentially helped create what will become an increasingly important new asset class. “This is the ﬁrst time we mimicked a project ﬁnance structure and repackaged it to bond investors,” says Andre Silva, co-head for debt capital markets at Deutsche Bank, which led the transaction along with Banco do Brasil, HSBC and Santander. “This is risk that banks are typically more willing to take than institutional investors.” With a lot more drillship ﬁnancing on the horizon as Petrobras gears up to start production in Brazil’s o shore pre-salt ﬁelds, banks will have to free up space on their balance sheets to continue lending to these types of credits, and project bonds can now act as that pressure valve. “There are huge infrastructure ﬁnancing needs throughout Latin America,” says Dan Vallimarescu, head of LatAm DCM at Santander. “So

this is ﬁnally a new way of funding [infrastructure] in the bond market.” More broadly, project bonds like Odebrecht’s are expected to take the baton from the European banks that dominate the project lending space but are now retreating from the region in the face of troubles at home. Being one of the ﬁrst of its kind, OOG’s bond required considerable groundwork. Leads held extensive meetings with the rating agencies to ensure the structure was unassailable and to achieve what in the end were Baa3 and BBB ratings from Moody’s and Fitch respectively. Leads ﬁrst received feedback from key investors and built a transaction around those discussions before opening it up to broader audience. Construction risk was seen as a stumbling block for bondholders who are typically less willing to accept such exposure. But with the drillships fast approaching completion and the structure covering other insurance guarantees, such concerns were largely assuaged. Meanwhile, other risks were mitigated through the structure that trapped cash ﬂows from the 10-year charter with Petrobras in a waterfall system to cover three months of operating expenses and six months of debt service. “It was challenging explaining how the security works,” says Alexei Remizov, head of Brazil capital markets at HSBC. “It wasn’t your typical senior unsecured obligation.” Whispers of mid 6s got the ball rolling and a $1.5 billion cap on size helped generate interest among accounts, some of whom liked the pick-up to o taker Petrobras. After releasing guidance at 6.5% area, the deal priced at 99.818 with a 6.35% coupon to yield 6.375%, or 370.3 basis points over US Treasuries, and by mid December was still trading nicely above par at a bid of 102.75. An order book of over $5 billion and participation from over 240 accounts was seen as vote of conﬁdence in the new structure and has laid the foundation for more to follow. LF

UPDATE
For the full story and daily news on project ﬁnance, see www.latinﬁnance.com

January/February 2012

LATINFINANCE 49

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Latin Finance - January/February 2012

Table of Contents for the Digital Edition of Latin Finance - January/February 2012