Rutas del Pacifico
Latin Transport Infrastructure
Deal of the Year 2002
Rutas del Pacifico
Closed on 9 April 2002, Rutas del Pacifico is a watershed in the way Latin projects are financed. The $300 million toll road project bond, arranged by Santander, established an entirely new template by combining financial guaranty insurance and multilateral A/B financing structures in the first co-operation between a multilateral (the IDB) and a private monoline insurer (FSA). Furthermore, the financing was the largest local capital markets infrastructure deal to date in Chile and achieved the lowest fixed coupon rate yet for a local currency infrastructure bond in Chile (5.8%) while pushing tenor to a record 23 years.
The innovation, and consequent benchmarks, mirror the difficulty sponsors and arrangers had in getting investors comfortable with Rutas del Pacifico which, prior to structuring, had less favourable project fundamentals than previous Chilean road deals.
The project is the first Chilean concession not to comprise a section of Ruta 5, the heavily-trafficked Chilean segment of the Pan-American Highway. Previously-closed concessions had conditioned the market to expect the advantages of through traffic on the main north-south artery in Chile. Consequently, the sponsors and insurers had to spend extensive time on financial and technical due diligence as well as the negotiation of documentation to address the concession's perceived shortcomings.
Rutas del Pacifico is a special purpose vehicle owned jointly by Spanish construction players ACS and Sacyr, each with a 50% stake. It won the concession bid from the Chilean Ministry of Public Works (MOP) in 1998. The concession comprises the existing 109 km section of Ruta 68 between Santiago and the port of Valparaiso; the Ruta Las Palmas from Valparaiso to the resort town of Viña del Mar; the new 18 km Troncal Sur linking Viña del Mar with the cities of Quilpué, Villa Alemana and Peñablanca; the new 10 km road between the Troncal Sur and Ruta 68; and a new section of the Américo Vespucio road between Ruta 68 and Ruta 78. The operation and maintenance of the existing roads commenced soon after the award of the concession.
Current revenues under the concession are subject to a sharing mechanism with the government. This mechanism is important, since the Rutas del Pacifico concession is the first to be offered without a fixed term. Instead, the concession lasts for as long as it takes for the sponsors to earn back a fixed return on their investment. This approach, dubbed the NPV model, is known as the Ingresos Total de la Concession (ITC).
A consequence of the ITC system is that the bonds were structured with a mechanism for mandatory prepayment. The amount of prepayments is calculated according to cumulative revenues in order to have the bonds fully repaid prior to the termination of the concession, regardless of the initial tenor of the bonds.
The mandatory prepayment structure also had to be structured in order not to affect the saleability of the bonds. For example, the mandatory prepayment requirement necessitated the creation of an anticipated prepayment account, which accrues cash if the concession revenues exceed certain projected levels. That cash is then used to prepay the bonds as necessary, thus harmonising the termination of the concession upon accrual of the ITC with the repayment of the bonds.
The model has important implications for the sponsors. On the upside risk is vastly reduced. On the downside they forego any upside gained through operating efficiencies and traffic volume improvements.
The $300 million debt issuance comprises three sets of notes. Series A at 12 years with a 5.5% coupon; Series B and C both at 23 years and with a 5.8% coupon. The issue comprises Unidades de Fomento (UF) denominated local bonds (a Chilean peso-denominated unit with daily adjustment to inflation) which are popular with long term Chilean investors. Furthermore, because tolls are collected in local currency and toll rates are adjusted to inflation, and because the debt is denominated in UF, the structure protects the bonds against foreign exchange and inflation risks.
The key element and major innovation in the deal is the extension of the IDB guarantee umbrella around private monoline FSA which acts as a co-guarantor of the bonds, rather than a reinsurer. According to Phillipe Birebent, member of the PRI team at IDB, ?the structure is, in effect, a new financial instrument?. The IDB remains guarantor of record in privity of contract with the bondholders. The relationship between IDB and FSA, as guarantor of record and co-guarantor, is analogous to that of the IDB and the commercial lenders participating in the IDB's Private Sector department A/B loan program with FSA reaping the benefits of IDB preferred creditor status. Debevoise & Plimpton, counsel to the IDB and FSA, assisted in the design of the IDB-FSA wrap structure.
The ramifications of the structuring on Rutas del Pacifico are far reaching. The IDB and FSA co-guarantee has broadened the Chilean capital market by attracting highly-capitalized local institutional investors and by increasing the volume of bonds it is possible to sell. The co-guarantee is already being repeated on the Costanera Norte project (sponsored by Impreglio) for which IDB is mandated and is looking for a co guarantor and likely to be replicated elsewhere in Latin America.
Deal of the Year 2002
Rutas del Pacifico
Closed on 9 April 2002, Rutas del Pacifico is a watershed in the way Latin projects are financed. The $300 million toll road project bond, arranged by Santander, established an entirely new template by combining financial guaranty insurance and multilateral A/B financing structures in the first co-operation between a multilateral (the IDB) and a private monoline insurer (FSA). Furthermore, the financing was the largest local capital markets infrastructure deal to date in Chile and achieved the lowest fixed coupon rate yet for a local currency infrastructure bond in Chile (5.8%) while pushing tenor to a record 23 years.
The innovation, and consequent benchmarks, mirror the difficulty sponsors and arrangers had in getting investors comfortable with Rutas del Pacifico which, prior to structuring, had less favourable project fundamentals than previous Chilean road deals.
The project is the first Chilean concession not to comprise a section of Ruta 5, the heavily-trafficked Chilean segment of the Pan-American Highway. Previously-closed concessions had conditioned the market to expect the advantages of through traffic on the main north-south artery in Chile. Consequently, the sponsors and insurers had to spend extensive time on financial and technical due diligence as well as the negotiation of documentation to address the concession's perceived shortcomings.
Rutas del Pacifico is a special purpose vehicle owned jointly by Spanish construction players ACS and Sacyr, each with a 50% stake. It won the concession bid from the Chilean Ministry of Public Works (MOP) in 1998. The concession comprises the existing 109 km section of Ruta 68 between Santiago and the port of Valparaiso; the Ruta Las Palmas from Valparaiso to the resort town of Viña del Mar; the new 18 km Troncal Sur linking Viña del Mar with the cities of Quilpué, Villa Alemana and Peñablanca; the new 10 km road between the Troncal Sur and Ruta 68; and a new section of the Américo Vespucio road between Ruta 68 and Ruta 78. The operation and maintenance of the existing roads commenced soon after the award of the concession.
Current revenues under the concession are subject to a sharing mechanism with the government. This mechanism is important, since the Rutas del Pacifico concession is the first to be offered without a fixed term. Instead, the concession lasts for as long as it takes for the sponsors to earn back a fixed return on their investment. This approach, dubbed the NPV model, is known as the Ingresos Total de la Concession (ITC).
A consequence of the ITC system is that the bonds were structured with a mechanism for mandatory prepayment. The amount of prepayments is calculated according to cumulative revenues in order to have the bonds fully repaid prior to the termination of the concession, regardless of the initial tenor of the bonds.
The mandatory prepayment structure also had to be structured in order not to affect the saleability of the bonds. For example, the mandatory prepayment requirement necessitated the creation of an anticipated prepayment account, which accrues cash if the concession revenues exceed certain projected levels. That cash is then used to prepay the bonds as necessary, thus harmonising the termination of the concession upon accrual of the ITC with the repayment of the bonds.
The model has important implications for the sponsors. On the upside risk is vastly reduced. On the downside they forego any upside gained through operating efficiencies and traffic volume improvements.
The $300 million debt issuance comprises three sets of notes. Series A at 12 years with a 5.5% coupon; Series B and C both at 23 years and with a 5.8% coupon. The issue comprises Unidades de Fomento (UF) denominated local bonds (a Chilean peso-denominated unit with daily adjustment to inflation) which are popular with long term Chilean investors. Furthermore, because tolls are collected in local currency and toll rates are adjusted to inflation, and because the debt is denominated in UF, the structure protects the bonds against foreign exchange and inflation risks.
The key element and major innovation in the deal is the extension of the IDB guarantee umbrella around private monoline FSA which acts as a co-guarantor of the bonds, rather than a reinsurer. According to Phillipe Birebent, member of the PRI team at IDB, ?the structure is, in effect, a new financial instrument?. The IDB remains guarantor of record in privity of contract with the bondholders. The relationship between IDB and FSA, as guarantor of record and co-guarantor, is analogous to that of the IDB and the commercial lenders participating in the IDB's Private Sector department A/B loan program with FSA reaping the benefits of IDB preferred creditor status. Debevoise & Plimpton, counsel to the IDB and FSA, assisted in the design of the IDB-FSA wrap structure.
The ramifications of the structuring on Rutas del Pacifico are far reaching. The IDB and FSA co-guarantee has broadened the Chilean capital market by attracting highly-capitalized local institutional investors and by increasing the volume of bonds it is possible to sell. The co-guarantee is already being repeated on the Costanera Norte project (sponsored by Impreglio) for which IDB is mandated and is looking for a co guarantor and likely to be replicated elsewhere in Latin America.
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