El Cajon: Cross-border, but not cross

Financing for the 750MW El Cajon hydroelectric plant is the largest and most high profile electricity infrastructure project in Mexico in recent times. And it is the first project bond transaction for a Mexican project since 1998's Monterrey Power deal.

El Cajon is located on the Rio Santiago in Nayarit. It has been built as part of the Proyectos de Impacto en el Registro del Gasto (pidiregas) programme. It is a priority project, one that the state-owned electricity incumbent, the Comision Federal de Electricidad (CFE) will buy at completion.

But construction is in the hands of the private sector, in this case a consortium of Promotora e Inversora Adisa (36%), Ingenieros Civiles Asociados (25%), Energomachexport Power Machines (19%) and Peninsular Compania Constructora (20%).

Gabriel de la Concha, head of project finance, ICA, identified two major challenges to the financing: "The first one was to get bridge financing for construction start-up. We had to convince WestLB to give us a bridge loan whose take-out would be the financing raised by themselves – the famous 'bridge to hell'.

"The second one was time. That was merely the biggest concern we were dealing with. The project's construction schedule is tight and in order to meet it we had to provide funds for construction sharply on time. Since many of the structures to be established were new, we had to convince rating agencies and banks and potential bondholders and lawyers while documenting and negotiating and translating engineering terms to legal language. All these issues took time, which made us always check available funds from our bridge loan."

The proceeds from the debt were needed to complete construction and repay the $100 million bridge loan from 2003. The bank debt has been structured so that CIISA draws down the funds as and when they are required for a given piece of work. The debt will largely amortize at the end of the deal's life. Completion and delivery are scheduled for August 2007, while the debt matures on 31 August 2007.

WestLB raised $452.4 million in private placements, with banks that saw the info memo impressed with the structure and, particularly, the pricing, which was 300bp over Libor.
The bulk of the remaining funds came in through a $230 million Rule 144A issue. This was co-led by Citigroup, had the same maturity as the bank facility, and priced at launch at 349bp over treasuries, for a coupon of 6.5%.

Although it was rumoured that at close WestLB was left with a hold substantially similar to its bridge financing, as of December 2004 there were 11 institutions participating: BBVA, Caterpillar, DEPFA, GE, HSBC, Interacciones, KBC, NordLB, Santander, UFJ, and WestLB – leaving average holds at $30 million with a maximum of $75 million. ABSA and KfW came in later.

The bond piece achieved a substantial oversubscription despite its short maturity, and could well set a precedent for other Mexican borrowers looking to raise dollars overseas.
For CIISA, the capital structure also includes $56 million in letters of credit to cover potential overruns and/or penalties to CFE. These LCs also function as quasi-equity, since the sponsors are not putting up any equity upfront. Providers of the LCs are Banco Santander, Bank of New York, UBS and WestLB.

Following El Cajon, will bonds be a more commonplace feature of the Mexican power market? Not for greenfield projects. "The bond market, as it is, is not the optimal debt source for construction: the implied negative carry hurts the financing cost of the project and its competitiveness," says de la Concha. "We do not see arrangers relying on a bond placement as a first choice for a source of financing during bidding stages. I believe that, as it happened in El Cajón, these will be used as back-up plans. We certainly are engineering new ways to approach this market, while mitigating the arbitrage issue for next projects, but we are taking it one step at a time."

El Cajon gives an indication to the CFE as to the future way it should bid out its non-IPP projects, which will now rely on the contractual structure (build now, and CFE will pay later). However, the financing structure applied to these deals is likely to change. Whilst the deal spans the divide between short-term bank facilities and patchy long-term debt provision, greater efficiencies could be squeezed out in the future.

Says de la Concha: "The financing structure has room for improvement, modifications, changes and it will certainly change from project to project on a structural basis. Since many financial institutions now know the transaction, it has been commoditised. To win new projects, we will have to do different things."

Constructora Internacional de Infraestructura S.A.
Status: Closed 5 March 2004, syndication closed December 2004
Size: $682.4 million
Location: On the Rio Santiago in Nayarit, Mexico
Description: 750MW hydroelectric financing under the pidiregas programme
Sponsors: Promotora e Inversora Adisa (36%), Ingenieros Civiles Asociados (25%), Energomachexport Power Machines (19%) and Peninsular Compania Constructora (20%)
Debt: $452.4 million in bank debt, $230 million in 144A bonds, $56 million in letters of credit
Lead arranger: WestLB
Maturity: 2007
Lawyers to the banks: Vinson & Elkins
Lawyers to the underwriters: Milbank Tweed Hadley & McCloy
Lawyers to the sponsors: White & Case (international),
Suayfeta y Asociados (local)
Technical adviser: Sargent & Lundy