Mexico's toll road programme, after a patchy start, has started to build up momentum. Not only have new real toll concessions begun to come to market at regular intervals, but FARAC, the concession for the operation and upgrade of a package of existing roads, is set to attract an impressive valuation. The Mexican transport sector now has a claim to rank much closer to developed markets, or at least the region's pioneer, Chile.

The Latin American experience of operating roads concessions is patchy, and structures have varied between availability-based concessions, real tolls and contractor financing schemes. Activity in the Chilean market, which led the way in creating innovative support mechanisms for weaker road concessions, has tailed off, and its roads projects are now in a phase of refinancing, with a limited number of new developments.

Peru's roads programme has taken a different path, by developing a concession structure that shields sponsors and lenders from traffic risk altogether. Brazil's PPP road market is still embryonic, though with a number of projects up for tender. But the country's roads programme has experienced limited progress at state and federal levels, and both tiers have struggled to come up with a viable model.

Mexico matures

Six bids for the FARAC concession were submitted to the Secretaría de Comunicaciones y Transportes (SCT) on 18 July 2007, and range from between $2.7 billion and $4.1 billion. A consortium of ICA and Goldman Sachs, with financing from Santander, presented the highest bid.

The bids were very competitive, and the difference between the leading bid and the second-runner was 1%. The other bids came from IDEAL and Macquarie, with funding from CSFB and JP Morgan Chase (Ps43.43 billion), Abertis with Barclays and ScotiaBank (Ps42 billion), Global Via, an FCC consortium, with HSBC, West LB and Caja Madrid (Ps41.9 billion), OHL with BBVA (Ps39 billion) and a CCR/Brisa/Hermes bid, with Merrill Lynch (Ps29 billion).

Since so many major contenders submitted proposals (and an even greater number prepared bids but did not submit), and the project is being hailed by sponsors and bankers alike as an important, potentially precedent-setting deal.

This 30-year concession is part of a comprehensive roads development initiative in the country, under which some concessions have already been awarded. The brownfield concession will involve the upgrading of four major toll roads, the largest of which is in the city of Guadalajara, and will also require some minor new construction.

The Mexican toll road market had been sluggish for ten years but, since 2006, is now in a phase of significant investment and development. The federal government is in the process of developing its 342,000km highway system, as part of a greater infrastructure development scheme that includes schools, hospitals and other transportation. In 2006, it saw $1.05 billion invested in 620km of roadways.

In fact, the SCT, the government agency responsible for these projects, aims to tender one road concession per month, so as to avoid a build up of bids and to stagger the work required of its staff. Mexico's BBB sovereign rating, and A-rated local currency rating (both S&P) are contributing to international investment in its infrastructure assets.

Broadly speaking, Mexican road projects break down into real toll projects and availability-based PPP (PPS, as the Spanish initials go) roads. FARAC, as the sale of an existing asset complete with traffic risk, stands to one side of the construction programme but shares more similarities with a real toll concession.

The two models feature certain similarities; for the toll concessions, for example FARAC and the recently-closed Saltillo-Monterrey deal, the SCT grants the right to collect tolls on a given section of road following a public bidding process. The SCT retains the design risk and rights of way, and sets maximum toll rates. It also sometimes offers an initial contribution of public funds, and a minimum revenue guarantee.

The maximum term of a concession is 30 years. This model favours the proponent with the bid that either requires the least public money, whether in initial subsidy or revenue support, or the highest bid. The most recent real toll project to reach financial close was Saltillo – Monterrey, for which Isolux is the sponsor, and for which Santander, Imbursa, ING, and Dexia closed a Ps2.62 billion debt facility in May (for more details search for "Saltillo-Monterrey" at www.projectfinancemagazine.com).

The PPS contracts are intended to improve the existing toll-free roads, have lengths of 15 to 30 years, and involve a similar bidding process to the highway concessions. This model features availability payments to the private partner. These projects are awarded based on the net present value of the availability payments, with the lowest winning. The first of the PPS projects to close was the Irapuato to La Piedad toll road, which ICA closed in September 2006.

The Ps730 million ($67 million) total investment included a 14-year, Ps580 million debt facility, provided by Santander, and a Ps130.5 million partial guarantee from the IFC. ICA, through its SPV CONIPSA, has the incentive to complete both the entire road and individual sections on time, by receiving only 70% of the availability payments for each of the 16 sections of the road as they are finished, but the full 100% only when the whole road is completed.

The financings for the more recent deals have evolved from CONIPSA and its companion concession, Queretaro-Irapuato, for which ICA is also sponsor. In this respect they simply echo the complexity of the concessions on offer. The Nuevo Necaxa to Tihuatlán highway project, for which FCC and ICA are the sponsors, is a more challenging project to build and operate. It features a blend of real toll and PPS revenues, with tolls offsetting contributions that the SCT may have to provide. The winning sponsors submitted the sole bid, a sign that permitting and traffic forecasting issues still bedevil new road projects.

Nevertheless, for the $750 million financing, which closed on 6 July, Santander's structure was a little more aggressive. The $620 million (Ps6.887 billion) facility has a shorter tenor, at 9 years, and features a mini-perm amortising bullet, with a 100% cash sweep providing an incentive to refinance. The debt-to-equity split is 80/20. The pricing starts at the Mexico inter-bank rate (TIIE) plus 165bp for the first four years during the construction phase, increasing to TIIE +185bp in years 5 to 7, and then TIIE +200bp from year 8 until maturity. The debt service coverage ratio (DSCR) is a minimum of 1.3x and an average of 1.55x. Santander is considering syndication.

ICA will be behind the next two financings to come to market, since it is preferred bidder on the Río Verde to Ciudad Valles PPS road project, and the likely winner for FARAC, unless the SCT opts to assess the bids on anything other than price. ICA's current dominance of the market reflects in part its ability to recover from the Mexican crisis of the late 90s much quicker than its peers. And while it saw off impressive competition on FARAC, its limited competition on other sections suggests the Mexican market is still far from fully mature.

Chile: living it up in old age

Chile, on the other hand, has most definitely grown up. Following a lot of activity from 1998, in what is considered the most developed of the roads markets in Latin America, it has slowed in 2006 and 2007, and fewer deals have emerged. The early years of the decade comprised some extremely popular financings for real toll projects around the country's capital, Santiago, as well as some innovative restructurings of inter-urban roads (for more details search "MRG" at www.projectfinancemagazine.com).

Over the last year, Chile has seen refinancings of smaller roads rather than new projects. The refinancings of the Autopista del Sol, and Autopista del Boque following Cintra's acquisition of the concession, were the first of the new generation, and both closed in the third quarter of 2006. The assets have performed well, and traffic levels have exceeded original projections, allowing for greater leverage and longer tenors on debt. Moreover, Chilean interest rates have fallen approximately 4 percentage points to around 3% to 4% in the last five years.

OHL raised $45 million equivalent in additional bond debt on its Sociedad Concessionaria Autopistas los Libertadores (ALLSA) road to finance further work. ABN Amro was bookrunner, and the bonds were wrapped by XL. Further refinancings, whether to releverage projects or to fund additional work to the Chilean government, are likely to follow.

The Ministerio de Obras Públicas (MOP), the Chilean ministry of public works, has a budget of $4 billion for the next 2 to 3 years, and will provide between $800 million and $900 million to refinance the existing toll roads built since 1998. The intention is to upgrade the roads and to improve connectivity by linking existing routes. Banks will have opportunities for underwriting bank and bond debt that anticipates such grants or subsidies.

Rudy Hassam, a vice-president at ABN Amro in Chile, believes that the urban highway north of Santiago, to Aconcagna, is a high priority for the improvement programme, and expects to see a concession offered for tender shortly. A number of new public-private partnership projects are also slated for construction. The first of these is a $300 million project on Ruta 160, south of the city of Concepción, which is expected to be offered for tender in September. A number of international operators and banks are preparing bids.

The country has had an A-rating and A+ rating on its local currency, and is ripe for further infrastructure investment. But many investors believe that the government is overlooking the excess of liquidity and potential for greater private involvement in the country's infrastructure projects. However, a trans-Andean train line between Los Andes in Chile and Mendoza in Argentina, for which both countries are running bidding processes, is one priority. "Maybe a second wave of roads will follow in its wake," muses one infrastructure player.

Peru: Financing contractors, not projects

In Peru, the fourth of the IIRSA toll road concessions, IIRSA Centro, is in the bidding process, and BNP Paribas recently closed the $562 million InterSur financing for the fourth section of the Inter-Oceanic highway for sponsors Andrade Gutierrez, Queiroz Galvao and Camargo Correa. To date, the four Peruvian deals have been somewhat similar structurally.

The IIRSA Norte, IIRSA Sur and InterSur deals all went ahead as dollar bond issues, and relied upon government certificates of completion, CRPAOs, to backstop the projects' credit. Bondholders simply rely upon the proceeds of these certificates for repayment, but since proceeds are only released from an escrow account when these certificates are issued, there is very little exposure to either traffic or contractor performance. The structure is a recognition that neither are strong enough to support a cross-border project bond.

As such, the bonds are roughly similar to sovereign obligations of the government of Peru, although they cannot be considered public debt. Nevertheless, the ratings of the two are close. The sovereign rating of Peru is BB+/Ba2/BB+ (Standard & Poor's, Moody's and Fitch respectively). The InterSur bonds were rated BB/Ba2/BB+, while the IIRSA Norte bonds were BB/Ba1/BBB–, and IIRSA Sur BB/Ba2/BB+. The gap represents the potential for delays in payment, and the fact that the bonds, although not the CRPAOs, are not full and faithful obligations of the sovereign.

Indeed, the main risk with the IIRSA template is investors, while made whole in the event of a default, will not have earned a relatively attractive return on funds invested. The main difference between the IIRSA deals is the way in which the underwriters dealt with this. Morgan Stanley, on the Norte deal, provided a credit-linked note so as bondholders would get some degree of yield on their investments. Alternatively, on the Sur deal, Merrill Lynch provided a cash-management agreement for the bonds. On the InterSur deal, BNP Paribas used a different method; it brought in Goldman to place a total return swap on the bonds to guarantee a fixed return to investors.

The forthcoming IIRSA Centro concession is for the remaining section of the highway and the Peruvian investment promotion agency, ProInversíon, has pre-qualified five teams for the project, which is expected to cost in the region of $90 million. The concession, like its predecessors, will involve the upgrade and maintenance of the highway. The competing teams are Concesión Vial Amazonas Centro, Centro IIRSA, Peruano del Centro (comprising Graña y Montero and JJC), Eje Centro (Odebrecht and Andrade Gutiérrez) and Concesionaria del Sur.

The list of bidders reflects the limited number of construction companies comfortable with working in Peru. Odebrecht (60%), Graña y Montero (19%), and JJC (7%), and ICCG (4%) all held the Sur concession, while Odebrecht and Graña y Montero worked together on Norte (together with Andrade Gutierrez). The size of the concession is also unlikely to attract a broader universe of bidders. But the IIRSA structure shows some potential for application to other assets, and has certainly proved popular with debt markets. Peruvian accounts apparently became more interested in the IIRSA bonds on subsequent issues. These were initially sold primarily to US accounts.

Brazil brings up the rear

In Brazil, following enabling legislation in December 2004, the first of the country's PPP projects have been approved by the federal government, with the country's development bank, Banco Nacional de Desenvolvimento Econômico e Social (BNDES), set for a prominent role in financing them. The country's sovereign rating has been upgraded by Fitch to BB positive, from stable, and there are around thirty projects being considered. But there have also been a number of political delays in tendering projects; not least the re-election of the President, Luiz Inácio Lula da Silva.

Barbara Brito, of the federal ministry of planning's project team, explained that concessions are bid out at two levels; either federal highways, which include interstate roads and main arteries within certain states (denoted by BR and a number), or state highways, which can be awarded by the local authorities.

The most recent federal project to be approved is for the BR-116, which is expected to cost R$1.1 billion ($590 million), and involves widening two sections of highway in the state of Bahia. This project had originally been devised as an availability-based PPP, but the ministry and the National Land Transport Agency (ANTT) took a decision on 9 July 2007 to offer the project as an entirely private concession. The ANTT will run the tendering process.

In terms of state highway projects, the state of Minas Gerais was the first to award a PPP concession for upgrading the MG-050, which crosses 372 km of the state, linking the city of Belo Horizone to São Paulo state. Equipav holds the 25-year, R$626 million ($349 million) concession, and took control of the road on 29 May 2007. The availability payments to the concessionaire are R$7.9 million per year, plus revenues from tolls.

The federal government may put a number of other roads out for for concession. These include a package of seven roads in the south-eastern states, which are currently under federal control, but which may be offered for tender, and which might attract substantial bids. Additional sections include part of the BR-380, which runs between Belo Horizonte and São Paulo city, another section of the BR-116 between Bahia and Minas Gerais, and the BR-040 between Río de Janeiro and Juiz de Fora.

However, despite some budding activity on the toll roads front, it has been three years since the legislation was passed, and though the government's infrastructure plan is a comprehensive one, there has been relatively little action following the rhetoric. "Perhaps once the BR-116 and MG-050 projects are underway, the other projects will follow," explains one banker following the market.