The MXN4.2 billion ($400 million) Autopista Mexico-Toluca toll road refinancing, otherwise known as Mextol, closed on 7 April. The deal is a key stage in the development of a liquid domestic market in Mexico for infrastructure bonds and a bold move in terms of tenor by monoline wrapper MBIA.

The project is part of PADEIM (Programa AAA de Infraestructura Mexico), an MBIA programme for the roll out of up to MXN25 billion in notes for infrastructure assets – other types as well as roads – conceptually similar to a US shelf registration. Funding such projects has been the preserve mainly of banks until now, but PADEIM offers the possibility to tap the potential funds available from Mexican pension funds.

PADEIM, the first such scheme in Latin America, 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 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. This will allow the sponsor, PACSA, to slash tariffs on the 21km highway by an average of 40% thanks 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 includes MXN1.47 billion of unwrapped subordinated debt, due in 2030, when the concession expires.

Part of Mextol's problems 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, currently among the highest for any toll road in Mexico, should 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 (UDEs), Mexico's inflation-indexed notes.

The bonds yield a fixed-rate real coupon of 5%, slightly higher than the 2003 refinancing, also issued in UDEs, 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 – by making it more affordable, Mextol will be less susceptible to economic shocks like the one Mexico suffered in the 1990s. 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 which ensures that all excess cash is used to pre-pay the senior debt, while a 12-month debt service reserve is also in place.

Mextol is MBIA's fourth financing of a Mexican toll road project. The monoline first entered the market in 2003 with the MXN1.94 billion financing of the Armec project, consisting of the Ecatepec-Piramides and the Armeria-Manzanillo toll roads. This was followed up in 2003 with the previous Mextol financing MXN2.2 billion Monterrey-Cadatereyta toll road in the northern state of Nuevo Leon in 2004.

All of these issues were made using UDE bonds, which make sense for such deals as, under the terms of the country's real toll concessions, tariffs rise in line with inflation. But PADEIM is designed not just for toll roads but for any kind of infrastructure asset – including the energy, water and hospitals sectors, among others – and can be used to finance the construction of new assets as well as refinancing old ones. As such, index-linking might not always be the optimal solution, but PADEIM can issue notes against any benchmark, including foreign currencies, which can be synthetically converted to pesos.

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. At least one more is expected before the end of 2006.

More risk averse monolines would refrain from wrapping infrastructure assets in Mexico, where memories of financial crises followed by waves of bankruptcies are still fresh. Yet the country has enjoyed sustained high growth in this decade, and 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.

MBIA's reward is that it has established itself as a dominant player in the capital market for infrastructure assets just as Mexico's PPS programme is coming to life. Although nominally it can support hospital programmes, PADEIM has come to soon for healthcare PPS schemes, which are not mature enough to face the unforgiving capital markets.

However, PADEIM has come just in time for the country's huge road building programme, which should produce a steady pipeline in the coming years.

Autopista Mexico-Toluca
Status: Closed 7 April 2006
Size: MXN4.2 billion of wrapped senior debt
Location: State of Mexico, Mexico
Description: Refinancing of a highway with the aim of using lower debt service to cut tariffs
Sponsor: PACSA
Bookrunners: BBVA, HSBC
Monoline: MBIA
Borrower legal: White & Chase
Lender legal: Debevoise & Plimpton