LatinFinance - September/October 2016 - 72

Mexico is roughly the same as conventional
power, Chilean renewables undercut high
conventional power prices. The country's
annual power prices - the latest of which,
in August 2016, resulted in the lowest solar
power price ever bid anywhere - provide
opportunities for new market entrants to
undercut established power providers,
with strong support from cross-border
lenders. The latest auction cover over 1GW
of new wind capacity and a likely investment of close to $2 billion.
Beyond Brazil, deal flow show pick up
soon. Peru, which for several years has
been awarding steady volumes of energy
and infrastructure projects through its Proinversión investment promotion agency,
has seen a downtick this year amid electoral
uncertainty. But the new president has
signaled he intends to get investment flowing again.
"We have a lot of hope next year for
Peru," says Aitor Alava, head of global
infrastructure and project finance for Latin
America at Natixis in New York. "There are
still some transactions going on - not the
same number of deals that we have seen in
the last year - but we expect the activity to
pick up in the next months."
Green shoots
Other markets are appearing or maturing.
Paraguay, for example, has recently completed the bidding process for its Ruta II and
Ruta VII road public-private partnerships,
under the auspices of a PPPs passed in 2013.
"I think this is a really important milestone
for Paraguay as a country", Sacristán says.
A much bigger market has emerged
this year in Argentina, which was due to
open bids in September for new renewable
energy capacity.
International developers are very keen
on the renewables program, but market
observers agree that commercial lenders
are unlikely to participate in the first round
of projects. "The first deals may get done
with more ECAs [export credit agencies]
and multilateral backing, but as the country
improves - and it has a large economy -
people are always going to be interested
in going back in", suggests Ralph Scholtz,
managing director and head of Latin
American project finance at Mitsubishi UFJ
Financial Group.
As 2016 comes to a close, Colombia has
proved its mettle in procuring infrastructure projects. At least five financings for
its 4G road concessions have closed this
year, Those concession feature some dollar

72 L ATINFINA NCE.COM - September/October 2016

revenues and attracted debt from local and
international commercial banks, development bank debt, debt funds, and local and
international capital markets.
"Some of those projects have some challenges in terms of construction complexity -
large viaducts and/or tunnels - and strength
of some of the local sponsors, but these
projects are overcoming their difficulties
and are getting financed," Alava comments.
But if the whole program is to advance,
more dollar financing will have to be accommodated, he adds. "I think Colombian
banks are getting to their capacity to finance, and I guess the government will have
to think of alternatives for some of these
projects," Alava says.
Pools of capital
Nonetheless, Latin America as a whole does
not appear short of projects - and local
investors are participating more and more.
Even Uruguay, with a modest pipeline of
projects, now warrants its own infrastructure fund, managed by development bank
CAF and funded by local pension funds.
"I think, as of today, we have more capital
than bankable projects," Sacristán says.
"Hopefully in the future it's going to be
different. I think we are going to see more
projects, because the infrastructure gap is
huge in the region. Governments will not
be able to fill the multibillion infrastructure
gap by themselves, so there's more space for

PERU AND COLOMBIA
HAVE ATTRACTED
BOND FINANCING
TO THEIR PROJECTS
BY RETAINING
SEVERAL PROJECT
RISKS AND BECAUSE
THEIR PENSION FUNDS
HAVE ENOUGH
CAPITAL AND
APPETITE

the private sector, but it's important to have
viable projects."
The diversity of sources as well as the
amount of capital on offer look set to increase. Project bonds will likely increase in
importance in 2017, not least as the implementation of Basel III makes its presence
felt on the debt maturities that banks can
offer. "I think there's been a gradual move
towards shorter-term transactions," Scholtz
comments. "There were a number of banks
that could provide long-term capital, but
the market forces are driving all banks
towards shorter-term deals."
And indeed, there seems to be no shortage of investors ready to buy project bonds,
with three infrastructure debt funds in
Colombia alone, and BlackRock and a team
of Sumitomo Mitsui Banking Corp. and BTG
Pactual are setting up a fourth and fifth
targeting the 4G program.
It would be foolish, however, to imagine
that project bonds are going to spread
across the region by themselves. Peru,
arguably the regional leader in project
bonds, and Colombia have attracted bond
financing to their projects in recent years by
retaining several project risks and because
their pension funds have enough capital
and appetite to write reasonably sized
tickets.
The Peruvian model, which uses unconditional government payment obligations,
is particularly challenging to replicate in
a constrained public-sector debt environment, Sacristán suggests. Mexico could theoretically raise dollar-denominated bonds
for some of its upcoming pipeline projects,
but banks are likely to bid too aggressively,
one source suggests, proposing Chile as a
likelier candidate. One $1 billion-plus Mexican bond deal, for the state-owned new
airport operator Grupo Aeroportuario de
la Ciudad de México, is expected to come to
market later this year, however.
"The key is who is taking construction
risk," Sacristán says. "It's quite difficult
for some institutional investors, pension
funds and also insurance companies to take
on construction risk - this is what we are
seeing." With this in mind, bridge-to-bond
deals look set to increase in popularity. US
developer Invenergy closed a bridge financing for its Campo Palomas wind project in
Uruguay in April, in what Sacristán calls a
"really innovative structure".
Investors look set to continue to innovate
across the region in the year ahead. But the
critical factor may be the familiar one - how
many bankable projects are there? LF

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