FARAC: Magic bullet

The sale of the first package of FARAC's roads concessions by Mexico's Secretaría de Comunicaciones y Transportes (SCT) inspired large volumes of controversy and market speculation in 2007, both north and south of the border.

The deal was notable in a number of respects; not only was it the largest infrastructure deal to close in the Americas in 2007, it was also the largest ever entirely peso-denominated financing for a private borrower in Mexico. With numbers like this, the buyer and its arrangers had to contend with inevitable complaints that it overpaid.
The Ps44.051 billion ($4.06 billion) paid for the 30-year concession was significantly more than both market and government expectations, which had estimated the value of the package at Ps30 billion, and the financing has set the bar for the forthcoming FARAC packages.

The deal serves as an indicator that the Mexican infrastructure market has reached a maturity surpassing most other Latin American countries, excepting possibly Chile, despite reverberations from the credit crunch.

The concession was awarded to a consortium of Goldman Sachs Infrastructure Partners with ICA, the Mexican construction company and sponsor which, it has been wryly noted, built three of the four roads in the deal before they were repossessed by the government amid the Tequila Crisis in 1994. These roads, and 39 others, were placed in a trust (the Fideicomiso de Apoyo para el Rescate de Autopistas Concesionadas, or FARAC), erasing sponsor equity, and government raised $20 billion equivalent, including associated prepayment penalties, in debt to bail out lenders to the projects.

Santander was mandated lead arranger and global co-ordinator for the debt that the sponsors closed to support the acquisition, and it brought in Dexia, Banorte, HSBC and NordLB at MLA level. The banks are still in the process of informally syndicating the debt.

Gabriel de la Concha, director of project finance at ICA, elaborates on the financing; "To have raised all that liquidity in pesos in a very short time was a challenge in itself, but the financing was also very aggressive on the part of Santander, many thought too aggressive, but they proved everyone wrong".

The debt, for which Santander was global co-ordinator, has a seven-year maturity, and features three tranches; a Ps31 billion acquisition loan, a support facility of Ps3 billion and a capex tranche of Ps3 billion. The concession requires spending of Ps1.5 billion on greenfield sections, and Ps3 billion on upgrading the existing roads. The latter tranches cover the required spending. Including the Ps15 million in equity, of which GSIP provided 80% and ICA the remaining 20%, the total cost of the concession is Ps48.56 billion before financing costs. ICA took responsibility for the operations and maintenance of the roads on 5 September 2007.

The government cap for concessions on existing roads is 20 years, so the greenfield aspect of the project is fundamental to justifying a 30-year concession period and the higher bids it commands.

The pricing started at 165bp over TIIE (the Mexico interbank rate), rising to 225bp over the life of the debt. The bullet facilities feature a sweep of excess cash, which starts at 25% in the first year, stepping up to 50% in the second year, 75% in years three, four and five, and 100% in the last two years. The step-up is designed as an incentive for the sponsors to refinance before the maturity of the debt. A refinancing in the domestic capital markets looks likely.

The four roads are between Maravatío and Zapotlanejo, Guadalajara to Zapotlanejo, Zapotlanejo to Lagos de Moreno, and Léon to Aguascalientes via Lagos de Moreno. These four roads combined account for 11.82% of the traffic volume of all 43 of the FARAC roads. However, in the remaining roads still available to be awarded by the SCT, there is one road, between Mexico City and Puebla, which alone accounts for 12.88% of the traffic, and seven others with higher traffic volumes than the busiest of the awarded roads.

The concession fee for this first set of roads has set a pricing benchmark for the future FARAC packages, despite slow syndication in a tough market climate. Refinancing the debt in the Peso bond market will be the sponsors' and lenders' next challenge. Still, market sources believe that the SCT has re-evaluated its plan for putting together the forthcoming deals now that it knows that the domestic market has – just – the liquidity.

Red de Carreteras de Occidente
Status: Closed September 2007
Size: Ps44.051 billion
Location: Mexico
Description: 30-year concession for four toll roads
Concession awarder: Secretaría de Comunicaciones y Transportes (SCT), Mexico
Sponsors: Goldman Sachs Global Infrastructure Partners, ICA
Equity: Ps15 billion
Debt: Ps37.1 billion
Maturity: 30 years
Bookrunners: Santander (global co-ordinator), Banorte, Dexia, HSBC and Nord/LB
Legal counsel to lenders: Allen & Overy (international), Ritch Muller (global)
Legal counsel to borrower: White & Case
Traffic consultant: Steer Davies Gleave
Legal counsel to SCT: Galicia y Robles
Financial advisers to SCT: NAFIN, Citigroup, Deloitte