ICA is Mexico's largest construction, engineering and operating company. It is about to take on the first of the FARAC roads concessions, in a consortium with Goldman Sachs. The $4 billion deal is the largest ever Peso loan to a private borrower in the country's history.

The win followed a strong showing in winning greenfield toll road concessions from the Secretaría de Comunicaciones y Transportes (SCT), the country's transport ministry. These are halcyon days for a firm that, after successes in the eighties and early nineties, was almost crippled by the Tequila Crisis of 1994. In a neat bit of symmetry, ICA's latest success involves taking over some roads that it was forced to give up during that crisis.

The Ps44.052 billion ($4.02 billion) FARAC acquisition, for four of the country's major toll roads, is the first move by the SCT to return these assets to a private operator. The bids it received exceeded the government's most optimistic forecasts, buoyed by the level of interest from international equity investors.

The six bids for the 30-year concession were very competitive, and there was a difference of only1.4% between the leading bid and the second runner. According to Gabriel de la Concha, director of investment and financing at ICA, the win came down to a combination of being willing to put the sponsors' equity to work, and an aggressive debt package.

Stretching balance sheets

Nevertheless, there was an element of luck involved; ICA/Goldman was set to bid Ps43 billion, but at the last hurdle, decided to push for a Ps45 billion bid by increasing the size of their equity contribution. The most the two could muster was Ps44.052 billion; although this was enough to clinch the assets by a tiny margin. The Ps15 billion in equity is split 80/20 between Goldman and ICA respectively.

But the bidder ICA most feared was the CCR/Brisa/Hermes with Merrill Lynch, even though it ultimately submitted the lowest bid, of Ps29 billion. De la Concha explains that the Merrill bond package was on a par with ICA's bank debt support from Santander. Merrill has put several bond issues together for ICA, including a securitisation of the revenues of its airport assets in Mexico, and a refinancing of its Corredor Sur toll road in Panama. Had the equity injection been more generous, he believes the bid could have been a formidable contender. He adds that the Macquarie/Abertis bid had the same minimal equity contribution.

The seven-year debt facility, which includes 3 tranches, was strong enough to take on a bond, but is likely to be a bridge to a later bond deal. The senior term debt is Ps31 billion, with a liquidity facility and a capex tranche each of Ps3 billion.

The debt is currently in syndication, and Dexia and Nord/LB have joined Santander as co-MLAs, taking the equivalent in pesos of $1 billion and $500 million respectively. (For details on the debt, the assets, and the background of FARAC, see the Deal Analysis in this issue). De la Concha says that such a debt structure has never been seen in US financings, and is better likened to European financing structures.

Back from the brink

Of the four FARAC roads in this first concession, three were built by ICA. During the economic meltdown of the mid-1990s, the Mexican government took over the roads, which, together with several other assets, were valued at $400 million. In return the lenders to these projects received government debt with a face value the same as the toll roads' debts, but the projects' equity was written off. Forty-three roads in all were put in a trust, known generically as FARAC.

While many other firms were filing for bankruptcy, a measure that ICA's financial advisers advocated at the time, it kept itself afloat by selling its assets at a loss, so as not to default on debt repayments, and dramatically reducing its staff. "That was the worst aspect of the crisis," says de la Concha, "it was a very difficult time. We reduced our employees to just 9,000. At the time we thought the company was crazy not to declare bankruptcy, but it proved wise in the long run". Head count has since recovered to 20,000.

2001 was make-or-break time for the struggling ICA. The first instalment of its outstanding corporate debt was due to be repaid. Unable to meet its obligations, ICA approached Carlos Slim, owner of Telmex, and both Latin America's richest man and at times the world's richest. A Slim-controlled bank, Imbursa, launched ICA's first equity offering, and thanks to the Slim stamp of approval the offering was three times over-subscribed. Slim has since founded IDEAL, an infrastructure fund that competes with ICA, and also holds several toll road concessions.

ICA launched a second equity offering in 2003, to meet a second debt maturity, and recently announced plans for a new issue of 90 million shares, which could raise roughly $500 million at current prices. The latest issue is designed to meet the huge equity requirements that a string of further concession successes would make of ICA, as well as ICA's equity contribution on FARAC.

The Red de Carreteras de Occidente structure
Source: Santander

Once bitten

By 2003, ICA had secured the first of its comeback projects, the Corredor Sur road concession in Panama, and was working on El Cajon, which it won in March of that year. ICA refinanced Corredor Sur in 2005, and it currently accommodates 60,000 vehicles per day, but de la Concha notes that the road has only this year begun to turn a profit. But, he explains, "these types of infrastructure assets are long-lived, and more resilient to fluctuating markets and bad times", even if they do not deliver immediate returns.

The difficult years, from 1994 until 2001, have led ICA to be "prudent and selective" about which deals to chase. Though it has won a number of the recent toll road concessions, de la Concha is also quick to point out that it has not won them all.

The company is comfortable with the transportation deals; "compared to a hydro project, building a road is like putting Lego together" de la Concha remarks. However, ICA is reluctant to venture out of its home market, "We understand the Mexican market. We are not interested in chasing US deals, and though we have some presence elsewhere in Latin America, we have had bad experiences in, for instance, Puerto Rico. There are enough deals in Mexico to keep us busy." He also cites currency risk as a major factor in ICA's preference for staying domestic. For example, as the FARAC deal is denominated solely in pesos, and will be financed, syndication permitting, entirely in pesos.

The Mexican market could soon take in availability-based contracts for hospital and university PPPs, but according to de la Concha, ICA is remaining circumspect: "We are watching the market, and we would have no difficulty in constructing a hospital or a university, but we do not yet understand the potential risks in the operations element of the concession. If we were to bid for any of these projects, we would want to have a knowledgeable and experienced partner."

ICA is comfortable, however, with availability-based concessions. While its most recent successes have been with real toll road assets, it won the first two PPS (the acronym spells out the Spanish for public-private partnership) concessions, for Irapuato-La Piedad and Irapuato-Querétaro (for more on both, search by name). The more recent Nuevo Necaxa concession features a combination of tolled and untolled sections, and was financed with Ps5.51 billion debt facility, also from Santander, that features a 100% cash sweep. The appetite that banks evidenced for this financing informed some of the choices that sponsor and arranger made for FARAC.

New frontiers

ICA does have holdings elsewhere in the transport sector, including a 52% stake in Grupo Aeroportuario del Centro Norte (GACN), which runs 13 airport concessions in Mexico, each with a 50-year length. Through its special purpose vehicle, AeroInvest, ICA recently securitised its GACN revenues, for Ps2.7 billion ($249 million). Merrill Lynch was the bookrunner on the bond issue, which featured three tranches: A Ps2.125 billion senior tranche of 10-year, EuroPeso bonds; a subordinated 10-year tranche of Ps325 million, and a one-year floating-rate tranche of Ps355 million. The senior bonds were priced at par and carried a 7.75% coupon, and the subordinated tranche priced for an 11.06% coupon. The bonds are backed by dividends from the GACN shares.

An ICA-led consortium also recently won a Ps2.854 billion aqueduct concession in the state of Queretaro. The project, the second in that state, involves the construction of a 108km system to bring water from the Infiernillo springs on the Moctezuma River to the state's capital. ICA's partners on the 50 million cub metres per year project are Hydro Capital (part of Mitsui, 26%), FCC (26%), and Proactiva (11%), and it is financing the project with Ps1.65 billion in 15-year debt from Santander and Nord/LB, as well as a contribution from Banobras' FINFRA infrastructure fund.

The water concessions involve little demand risk, and ICA can be much less choosy about where in Mexico it operates. For real toll concessions it has to be more selective. The solid traffic levels on the road in Guadalajara, a big city with increasing population, in the FARAC concession mean very robust cashflows. However, de la Concha cites the state of Chiapas as a prime example of where availability payments would be preferable to dependency on tolls. Chiapas is one of the least economically developed of the Mexican states, and so traffic volumes are not so certain as around big cities.

Though ICA is expending huge amounts of equity to secure its share of the Mexican infrastructure market, and increasingly taxing its lenders, de la Concha maintains that its investments are prudent, and that ICA is cautious about the projects it chooses. It has displayed a marked reluctance to compete on international projects, and it is even circumspect about domestic PPPs in sectors where it has little experience. Both indicate that the foundations of its recent successes have been in lessons learned from former losses. The company speculates where it is comfortable and, on the whole, is reticent of the unknown.

This first FARAC acquisition, if successfully executed, would seal ICA's place at the top of the country's infrastructure market. This deal represents the first of many potential FARAC packages, and there are single roads remaining in the trust that alone account for greater traffic volumes than the four FARAC roads put together. De la Concha points out that this acquisition was bigger than any of the US concessions to date; bigger even than the Indiana toll road. The next FARAC deals may well be bigger still.

ICA's challenge in coming months and years will be sustaining its pace of concession wins and raising the equity to support them. Finding partners with the deep pockets of Goldman Sachs and its clients is one solution, but bringing concessions to profitability faster is another. Of the roughly $500 million in equity that ICA hopes to raise in the next 12 months, $288 million has already been earmarked for the first FARAC purchase.

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ICA's hydro financing - then and now

While ICA's concessions business largely covers transport and water assets, its construction business covers a wider range of sectors, including power. It has won two large hydroelectric projects – El Cajon and La Yesca – which involve construction of an hydro plant and its transfer to Mexico's state electricity company, the Comision Federal de Electricidad, at completion. Lenders to these projects take on a little construction risk, as well as payment risk, though the returns on such dollar loans can be lucrative.

West LB financed ICA's El Cajon 750MW hydroelectric project in early 2004, and will also finance the forthcoming La Yesca hydro deal, which is similar in size and structure to the 2001 deal.

The El Cajon project was the subject of bond and bank debt totalling $742 million. Beforehand, ICA raised a $100 million bridge financing from WestLB, which De la Concha refers to, and not for the first time, as "the bridge to hell". Market sources suggested that WestLB would pay a heavy price for being so aggressive in support of ICA, but De la Concha sees the move as innovative. Nevertheless, Citigroup co-led arranged a $230 million bond piece, which was required to supplement bank appetite for the loan.

De la Concha says that on the El Cajon bonds, ICA took all the construction risk, because, unlike banks, bonds do not allow a staggered disbursement. "Bond investors are shy on financing and taking construction risk," he says, "banks have flexibility to put finance behind construction and disburse while you build as opposed to disbursing at once before construction starts. Capital markets are better for brownfield projects than for greenfield, because the construction risk is reduced".

The bid for La Yesca, the follow-up, includes a construction cost of $758 million, and involves the construction of a 750MW dam 105km north of Guadalajara. There is an option from the Inter-American Development Bank to cover 25% of the cost of the project with either an A-loan or a partial guarantee, but whether WestLB will take advantage of it has yet to be determined. If the loan allows lenders to increase their exposure to ICA, it might make sense.

Adolfo Rogel, a project manager with ICA, was responsible for both projects. He describes the second as an almost exact replica of the first, and says that the similarities, and the experience of the first project, allowed it to build competitively. La Yesca should close later this year, while the El Cajon project was turned over to the CFE on 10 September.