Latin American Transport Deal of the Year 2001
US bond investors have very long memories ? and the spate of
defaults on toll road bonds in the late 90s definitely falls within
their powers of recall. Chile, despite a successful record of
attracting foreign equity and bank debt, is still, in the eyes of
the dollar bond market, a Latin country in an unstable region. The
solution to Chile's first ever cross-border toll road bond was to
the sell the dollar accounts monoline risk.
The $420 million Autopista del Maipo issue is also the largest bond financing out of Chile and a decisive answer to some monolines, and their bookrunners, for whom local currency is the only viable way to finance a toll road. The deal, sponsored by Cintra (part of Ferrovial), insured by MBIA and underwritten by Morgan Stanley, is less of an example to other Latin American governments and more an example to countries with a similar rating. It is their public works programmes to which the monolines should come.
Autopista del Maipo is the latest financing for a section of the Ruta 5, the name given by the Chileans to the section of the Pan American Highway. More than in other locations for the road and given the unique topography of Chile, this is the main, and to a certain extent the only arterial route in the country. This makes the concessions that have been awarded for the various parts of the road extremely financeable.
This section runs from the town of Talca north to the capital Santiago de Chile, and is one of the busiest parts of the road. Whilst the north is the powerhouse of the still-profitable copper mining industry, it is the south that provides the agricultural produce that is growing in importance in Chile's export mix. Rail transport, whether human or freight, is negligibly important.
The concession calls for the sponsor to take over a 193km section of road, of which 80km is new construction work. The centrepiece of the work is a bypass of the town of Angostura and the Accesso Sur, which links the south and east of the capital. The work will involve a doubling of the number of toll plazas on the route.
This section, therefore, is one of the strongest yet bid out to the private sector. Other choice routes, such as the Santiago-Valparaiso route are not part of the Ruta 5 and will be financed on an NPV basis, which caps the possible sponsor returns. Moreover, this route has a 25-year history of tolling, and few available alternative routes.
The concession structure is similar to earlier deals in the country. A government guaranteed minimum payment is one way of assuring that there is a basic level of comfort for the investor. This, however, as all participants have recognised, is good for much less than the debt service on the project's debt. Toll revenues should be at a high level, although the sponsor believes that because of the new concession structure it might be possible to reduce tolls.
Nevertheless, the contract calls for a total capital requirement of as much as $750 million. While this figure is believed to be lower now, even at a conservative level of leverage the debt requirement was much more than the Chilean market could take. Plans to attempt a dual Peso/Dollar issue did not go ahead, partly because of possible intercreditor issues.
Because it was unlikely that the financing could go out in the dollar markets without a wrap, especially given the rising chorus of disquiet that affected the region in the latter part of 2001. MBIA has been selected to insure the bonds and, as is customary, worked with the sponsor to get an investment grade shadow rating on the deal. The selection marks a return to the Chilean market for MBIA, which had been losing ground to newcomers such as XL and FSA before Maipo, as well as a wrapped bond for Chilean-Peruvian utility Chilquinta.
But investors are still not willing to take on devaluation risk. According to deal participants a formal policy, along the lines of that which debuted on AES Tiete, would not have provided the unlimited coverage that would be required for a strong rating. The ever-helpful Ministry of Public Works, usually amenable to tweaking deals to make them more sellable, stepped up to provide a solution.
This is a currency hedge provided directly from the central government rather than the money markets. The advantage of such an arrangement is that it is less expensive than a private hedge, but also that the Chilean government can share in any gains from a positive movement in the price of the peso. However, the mechanism does not kick in until the peso goes above 220 to the dollar or below 180.
This is one of the difficulties with the hedge ? that the financing must incorporate 1.1 times debt service coverages simply to be sure of breaking even. The second is that a prolonged period of devaluation is usually the time when governments are least able to provide dollar hedges. Analysis, therefore, comes down in large part to government psychology and, as the recent experience in Argentina has demonstrated, that is not much of a science.
This, however, is an issue for MBIA to contend with, and the provision of the hedge required changes to Chilean legislation after an initial draft for the hedging contract was not robust enough. The financing also included a debt service reserve account that would take care of any lag between making up the losses on currency fluctuations and debt repayments.
The bond issue, led by Morgan Stanley, was relatively painless, and sold out in less than two days. Given MBIA's dominance in the municipal bond market, even hunting down seasoned project bond investors was not a prerequisite. The 21-year deal came in with a coupon of 7.3%.
The deal will probably have most impact on countries in a similar economic situation to Chile's, which means those countries in the top tier of the emerging market bracket. Several deal participants have noticed similarities in the South Korean concession programme, whilst saying that the Chilean version is superior. Another candidate is newly investment grade Mexico, although past experience of transport financing is less than inspiring.
Autopista del Maipo
Status: closed 22 August 2001.
Location: Chile
Description: Rehabilitation and construction on a 193km stretch of the Ruta 5 between Talca and Santiago
Sponsor: Cintra
Debt: $421 million
Maturity: 21 years
Coupon: 7.3%
Bookrunner and financial advisor: Morgan Stanley
Insurer and lead transactor: MBIA
Lawyers to the borrower: White & Case
Lawyers to the insurer: Debevoise & Plimpton (international), Claro y Cia (local)
Lawyers to the lender: Cleary Gottlieb Steen & Hamilton
Traffic consultant: Vollmer Associates
Local engineer: R&Q
The $420 million Autopista del Maipo issue is also the largest bond financing out of Chile and a decisive answer to some monolines, and their bookrunners, for whom local currency is the only viable way to finance a toll road. The deal, sponsored by Cintra (part of Ferrovial), insured by MBIA and underwritten by Morgan Stanley, is less of an example to other Latin American governments and more an example to countries with a similar rating. It is their public works programmes to which the monolines should come.
Autopista del Maipo is the latest financing for a section of the Ruta 5, the name given by the Chileans to the section of the Pan American Highway. More than in other locations for the road and given the unique topography of Chile, this is the main, and to a certain extent the only arterial route in the country. This makes the concessions that have been awarded for the various parts of the road extremely financeable.
This section runs from the town of Talca north to the capital Santiago de Chile, and is one of the busiest parts of the road. Whilst the north is the powerhouse of the still-profitable copper mining industry, it is the south that provides the agricultural produce that is growing in importance in Chile's export mix. Rail transport, whether human or freight, is negligibly important.
The concession calls for the sponsor to take over a 193km section of road, of which 80km is new construction work. The centrepiece of the work is a bypass of the town of Angostura and the Accesso Sur, which links the south and east of the capital. The work will involve a doubling of the number of toll plazas on the route.
This section, therefore, is one of the strongest yet bid out to the private sector. Other choice routes, such as the Santiago-Valparaiso route are not part of the Ruta 5 and will be financed on an NPV basis, which caps the possible sponsor returns. Moreover, this route has a 25-year history of tolling, and few available alternative routes.
The concession structure is similar to earlier deals in the country. A government guaranteed minimum payment is one way of assuring that there is a basic level of comfort for the investor. This, however, as all participants have recognised, is good for much less than the debt service on the project's debt. Toll revenues should be at a high level, although the sponsor believes that because of the new concession structure it might be possible to reduce tolls.
Nevertheless, the contract calls for a total capital requirement of as much as $750 million. While this figure is believed to be lower now, even at a conservative level of leverage the debt requirement was much more than the Chilean market could take. Plans to attempt a dual Peso/Dollar issue did not go ahead, partly because of possible intercreditor issues.
Because it was unlikely that the financing could go out in the dollar markets without a wrap, especially given the rising chorus of disquiet that affected the region in the latter part of 2001. MBIA has been selected to insure the bonds and, as is customary, worked with the sponsor to get an investment grade shadow rating on the deal. The selection marks a return to the Chilean market for MBIA, which had been losing ground to newcomers such as XL and FSA before Maipo, as well as a wrapped bond for Chilean-Peruvian utility Chilquinta.
But investors are still not willing to take on devaluation risk. According to deal participants a formal policy, along the lines of that which debuted on AES Tiete, would not have provided the unlimited coverage that would be required for a strong rating. The ever-helpful Ministry of Public Works, usually amenable to tweaking deals to make them more sellable, stepped up to provide a solution.
This is a currency hedge provided directly from the central government rather than the money markets. The advantage of such an arrangement is that it is less expensive than a private hedge, but also that the Chilean government can share in any gains from a positive movement in the price of the peso. However, the mechanism does not kick in until the peso goes above 220 to the dollar or below 180.
This is one of the difficulties with the hedge ? that the financing must incorporate 1.1 times debt service coverages simply to be sure of breaking even. The second is that a prolonged period of devaluation is usually the time when governments are least able to provide dollar hedges. Analysis, therefore, comes down in large part to government psychology and, as the recent experience in Argentina has demonstrated, that is not much of a science.
This, however, is an issue for MBIA to contend with, and the provision of the hedge required changes to Chilean legislation after an initial draft for the hedging contract was not robust enough. The financing also included a debt service reserve account that would take care of any lag between making up the losses on currency fluctuations and debt repayments.
The bond issue, led by Morgan Stanley, was relatively painless, and sold out in less than two days. Given MBIA's dominance in the municipal bond market, even hunting down seasoned project bond investors was not a prerequisite. The 21-year deal came in with a coupon of 7.3%.
The deal will probably have most impact on countries in a similar economic situation to Chile's, which means those countries in the top tier of the emerging market bracket. Several deal participants have noticed similarities in the South Korean concession programme, whilst saying that the Chilean version is superior. Another candidate is newly investment grade Mexico, although past experience of transport financing is less than inspiring.
Autopista del Maipo
Status: closed 22 August 2001.
Location: Chile
Description: Rehabilitation and construction on a 193km stretch of the Ruta 5 between Talca and Santiago
Sponsor: Cintra
Debt: $421 million
Maturity: 21 years
Coupon: 7.3%
Bookrunner and financial advisor: Morgan Stanley
Insurer and lead transactor: MBIA
Lawyers to the borrower: White & Case
Lawyers to the insurer: Debevoise & Plimpton (international), Claro y Cia (local)
Lawyers to the lender: Cleary Gottlieb Steen & Hamilton
Traffic consultant: Vollmer Associates
Local engineer: R&Q
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