Mextol: High pitch tenors

The UDI1.2 billion ($400 million) Autopista Mexico-Toluca toll road refinancing (Mextol) was the largest project bond structured to date in the Mexican market and is a key stage in the development of a liquid domestic market in Mexico for infrastructure bonds.

The project is the first to benefit from the PADEIM (Programa AAA de Infraestructura Mexico), an MBIA programme for the roll out of up to MXN25 billion in notes for infrastructure assets – energy as well as roads – conceptually similar to a US shelf registration and offering the ability to tap Mexican pension funds. The deal spawned a benchmark 22-year tenor from monoline MBIA.

PADEIM has been registered with Mexico's securities regulator and lays out a standard set of documents and precedents for its projects. There is no cross-collateralisation of projects within the programme, and debt can be denominated in any currency through a variety of instruments.

Mextol is a 21km limited access highway between Mexico City and Toluca, in the state of Mexico. Operational for 15 years the toll road had become one of the most expensive routes in Mexico on a per kilometre basis.
The latest Mextol refinancing capitalises on improved market conditions since 2003, when it was last refinanced, to obtain a longer tenor on the debt – now due in 2028 instead of 2013 – and cut toll tarrifs by an average of 40% due to lower debt service.

Originally tendered in 1989 and refinanced in 1992 in the 144A market, the project suffered in the 1990s when a wave of bankruptcies hit Mexico's toll roads. Amendments were made to the concession agreement with many rights transferred to the government trust that issued the 2003 debt. Part of that refinancing involved the government converting part of what it was owed by Mextol into subordinated debt.

The latest refinancing also includes MXN1.47 billion of unwrapped subordinated debt, due in 2030, when the concession expires.

Part of Mextol's tariff problem stemmed from lower than expected traffic levels. Over two thirds of road users choose to avoid it, preferring instead the lower quality – but free – Route 15 that runs parallel. Cutting the tariffs is expected to boost volumes and reverse this problem.

The senior debt on the deal is issued through a trust created by Nacional Financiera (Nafin), one of Mexico's development banks. Standard and Poor's and Moody's rated the underlying debt BBB+/ Baa3, with MBIA wrapping it to AAA.

HSBC and BBVA were bookrunners for the issue, made in peso-denominated Unidades de Inversion (UDIs), Mexico's inflation-indexed notes. The bonds yield a fixed-rate real coupon of 5%, slightly higher than the 2003 refinancing, also issued in UDIs, which gave a 4.5% real coupon.

The higher interest rate, however, is more than compensated for by the 22-year tenor. Mextol benefits from extremely strong economic fundamentals, overall, as it is important artery serving growing and commercially important parts of Mexico City, and it is much safer and quicker than Route 15. However, high tariffs have been its Achilles heel. The tariff reductions are enshrined as part of the deal through a memorandum of understanding between the Treasury, the Transport and Communication Ministry, PACSA and MBIA.

The deal is also made attractive by average base case cover ratios of 1.9x with a minimum of 1.8x. Moreover, there is a cash flow mechanism that ensures all excess cash is used to pre-pay the senior debt, while a 12-month debt service reserve is also in place.

The parties that worked on Mextol are already working on bringing new issues to market, but are tight-lipped on what those projects will be.

More risk averse monolines would baulk at wrapping infrastructure assets in Mexico, where memories of financial crises followed by waves of bankruptcies are still fresh. But it is a sign of how rapidly the economic climate has improved in just three years that MBIA was able to extend the tenor on Tolmex so dramatically.

PADEIM has come just in time for the country's huge road building programme, which should produce a steady pipeline in the coming years. The latest call for responses to that pipeline is for the Rio Verde-Ciudad Valles section, a 112km section running through the state of San Luis Potosi; the Nuevo Necaxa-Tihuatlan, an 84km section 30-year concession that runs between the states of Puebla and Veracruz, and would be operational in 2011; and the Tapachula-Talisman section running for 45km through the state of Chiapas, with a branch that runs to Ciudad Hidalgo.

Autopista Mexico-Toluca
Status: Closed 7 April 2006
Size: UDI1.2 billion of wrapped senior debt
Location: Mexico
Description: Refinancing of a highway with the aim of using lower debt service to cut toll tariffs
Sponsor: PACSA
Bookrunners: BBVA, HSBC
Monoline: MBIA
Borrower legal counsel: White & Chase
Lender legal counsel: Debevoise & Plimpton