The mid-year project paper drought was difficult on those eager to diversify their portfolios from US power. Fortunate, then, that some of the best structured assets to come out since Enronitis spread in earnest have been in the Mexican gas sector. The San Fernando pipeline deal, a joint venture between El Paso and Pemex, looks like being another eagerly-received deal in the resurgent sector.

San Fernando is a 120km pipeline that runs from the north of Mexico to the centre of the country, carrying gas from the gas-producing areas in the Burgos basin and the US border to the gas-hungry part of Mexico around Monterrey, where there are a number of independent power projects in preparation. The most significant of these are the Naco Nogales and Hermosillo projects, the first of which is awaiting financing.

San Fernando has been structured and closed in a very short time since the misgivings surrounding the electricity sector have been less pronounced. According to one source lose to the deal, ?Pemex was eager to do this deal with private finance, and would be interested in using it for other assets.? Pemex Gas y Petroquimica Basica (PGPB) is responsible for co-ordinating projects in the gas transportation sector, and is less sensitive to outside involvement than outside observers might expect.

The project is structured as a commercial venture between state-owned PGPB and its private partner. And since it is not a pidirega, and is not considered controlled by Pemex it has few consequences for the United Mexican States' budget. But the pipeline is very much needed, since there is not sufficient compression capacity on existing pipelines to handle the volume of projected gas demand.

But the deal is still a Pemex, and by extension Mexican, credit. The role of the pipeline is simply to transport Pemex gas from one part of he country to another, so that both supply and offtake risk is in the hands of Pemex. Pemex takes 100% of the capacity on the pipeline, but it is probably part of El Paso's thinking that its 50% stake would give it an early entry into the sector. Should it deregulate, then an existing owner like El Paso would enjoy a near-incumbent's advantage.

The fundamentals, moreover, are moving steadily upwards. Mexico now has a triple-B flat rating, and seven independent power projects have also received upgrades. For this reason, the arranger, Citibank, was able to proceed without any political risk insurance at all on the deal. The option, according to sources close to the deal, was there, but few of the potential participants showed any real interest in the product.

There will still be export credit agency (ECA) support for the project ? US Ex-Im has approved a $68 million direct loan. The remainder of the $185 million financing ? $117 million ? will come from commercial banks without enhancement. This despite the fact that the deal is 80% leveraged. Those that liked the debt also noted that Ex-Im was able to come back with an approval in around five months. The Ex-Im portion covers compression machinery supplied by GE, while the contractor is Techint Mexico.

The 10-year deal was pitched to a small group of banks in early July, largely because the deal had to close in September to move ahead with the sponsors' deadline. It is believed to have been over 50% oversubscribed, and most of those pitched came back with a positive response The debt has been well received despite making its debut at a quiet period in the syndications market. Certainly, those who have seen the deal say that, given this quietness, and the desperate search for reliable assets, the financing was very attractive.

The transaction is now awaiting the completion of some conditions precedent, and the project now needs to obtain rights of way from the Mexicans affected by the pipeline. This could be a difficult task, given the loud opposition to recent plans for an airport near Mexico City.

asoductos de Tamaulipas

Status: closed

Size: $230 million

Location: Mexico

Description: 120km gas pipeline

Sponsors: El Paso, Pemex

Debt: $185 million

Arranger: Citigroup

Tenor: construction plus ten years

Lawyers to the lenders:

Shearman & Sterling

Lawyers to Ex-Im:

Mayer Brown Rowe & Maw

Financial advisor to Ex-Im:

Credit Agricole Indosuez

Independent engineer: RW Beck

Market consultant: Pace Global Energy

Insurance adviser: AON