Mexico City's Benito Juarez International Airport has long been at the limit of its capacity. This should change with the completion of a new terminal for the airport, scheduled to open in September 2006.

The new terminal will increase the airport's capacity from 23 million passengers per year to 32 million. As well as building new taxiways and runways, the project includes the construction of automated inter-terminal transportation, a hotel and parking for 3,000 cars to ease congestion at the airport's exits.

Financing for the $400 million project makes innovative use of the airport's current overcrowding by collateralising the debt repayment against the tax that passengers have to pay when they use the airport. The TUA, as the tariff is known, already provides the state-owned Mexico City International Airport (AICM) $125 million a year in revenues. This existing income source – combined with a credit enhancement from Nacional Financiera (Nafin) and Banco Nacional de Obras y Servicios (Banobras) – gave sufficient comfort to lenders for the deal to achieve highly competitive length and pricing.

Nafin, which like Banobras is a government development bank, was mandated by the Transport and Communications Ministry in February 2004 to devise a financing package for the Terminal 2 expansion.

The decision to expand the capital's existing airport came after a $2.3 billion traditional PPP scheme to build a new international airport at Texcoco was cancelled in 2002 after fierce opposition from local farmers angry at the expropriation of their land. In the intervening years a greenfield project financing was considered to fund the expansion of the existing airport, but Nafin recognised that the terminal could be funded more cheaply by making use of existing TUA revenues.

Nafin considered various options, including international commercial debt, involving a monoline insurer and going through local bond markets. It opted for a club deal with four banks in order to minimise the involvement of third parties and get a quick financing in place.

Late in 2004, Nafin invited HSBC, Citigroup-Banamex, BBVA Bancomer and Banco Imbursa to form an MLA club, each underwriting $100 million. The deal schedule was intense – meetings were held every Thursday between the MLAs, Nafin, Banobras, AICM, ASA (the Airport Agency, which owns AICM), the Finance Ministry and the Transport and Communications Ministry, until financial close was reached in August 2005. Banamex and HSBC subsequently sold down part of their share of the debt, bringing the total number of lenders to seven.

The floating rate debt priced at 100bp over Libor and was swapped to give a fixed rate of 5.6%, only 50bp higher than Mexican government risk. The 10.5-year tenor is the longest for this type of facility in Latin America.
The deal had to be structured in a way that would address the two types of risk involved in the project: traffic risk and tariff risk.

With the former the banks take on market risk, but this is low with year-on-year growth in passenger numbers projected at 4% to 5% between now and 2015. Trigger mechanisms are in place to protect the lender against three different events that would introduce non-market risk: the construction of an alternative airport; decentralisation of flights (the airport currently accounts for 40% of the country's air traffic); and changes made to the TUA exemption criteria.

Tariff risk enters into the project because the price of the TUA – currently $13 for domestic flights and $16 for international ones – is not determined by the project sponsor but by the Secretary of Transport and Communications. In the event that the minister sets the TUA below $7, Nafin and Banobras will cover any shortfall below that level, mitigating tariff risk by effectively putting a floor on passenger user fees.

The deal is demonstrative of the pragmatism and flexibility the Mexican government has needed to show in finding answers to problems after failing to muster enough support for its first choice solutions. Most importantly, the debt remains off balance sheet for the government even though the project sponsor is publicly owned.

It also sends a message to sponsors that, at a time when Mexico needs infrastructure investment, bank finance is available. This is an important turn-around for a country that a decade ago was emerging from a wretched financial crisis that shook international investor confidence in it.

It is Mexico's three large airport operators that will be most interested in the financial engineering behind this project. AICM is Mexico's only publicly-owned airport; Azur controls nine airports in the south-east, Cancun being the largest; Centro-Norte controls 14 airports in the north; while Grupo Aeroportario Pacifico is the largest of the three with 12 airports, including one in Guadalajara, Mexico's second city.

Unlike AICM, these operators are able to control the TUA they charge themselves, and may find future revenues from this tariff provides them with a valuable means of securing bank finance.

But the deal may also be of interest to the state-owned oil and power monopolies – Pemex and CFE respectively. These have already used similar financings to raise debt off balance sheet, but without achieving such long tenors or getting margins as tight. While the risks involved in these sectors are different to those posed by AICM, the deal raises the prospect that these companies might benefit from the lender appetite that exists in the current market.

Mexico City International Airport
Status: Closed 26 August 2005
Size: $400 million
Location: Mexico City
Description: Financing the construction of a new terminal
Sponsor: AICM
Equity: Zero
Debt: $400 million
Arrangers: HSBC, BBVA Bancomer, Banamex-Citigroup, Banco Imbursa
Financial adviser: Nacional Financiera
Sponsor legal: Santamarina y Steta
Lender legal: Sherman & Sterling, Galicia y Robles
Traffic consultant: Leigh Fisher