Salta: piercing the sovereign ceiling
The Salta Hydrocarbon deal is the first example of an Argentinean
sovereign entity reaching investment grade on a bond issue. The
deal, which carries a private political risk policy, marks the
latest step in the evolution of credit enhancement for cross-border
bonds, and sponsors wishing to monetize their investment in some of
the riskier areas of the world should take note. Argentina, which
has had rating agencies poring over its finances and an uncertain
economic outlook, has a fair number of provinces looking at doing
similar deals, and would-be imitators elsewhere in the region will
be looking to follow suit.
Argentina is currently rated at BB/B1/BB (Fitch/Moody's/S&P) for foreign currency obligations and has been on a negative outlook since December 2000. Argentina has only begun to emerge from a prolonged recession and several companies have been suffering from a credit crunch. One of the few exceptions to this picture is the energy sector, where domestic corporates have been revelling in the recent oil price boom.
The structure of the local government system is such that provinces enjoy a great measure of autonomy, although all benefit from varying degrees of prosperity. Redistribution between the province is handled through a central federal grant, which has been fixed as part of President de la Rua's reform programme. In general, the provinces with the lower per capita incomes and poorer infrastructure have been those nearer the interior and fringes, although these are usually the areas with the best exploration prospects for oil and gas.
The Salta Hydrocarbon Trust has been formed to monetize the proceeds from the royalties that the Province of Salta receives from oil exploration. The Hydrocarbon Law fixes this at 12%, and the revenues are collected directly from concessionaires as a proportion of well-head cost. Whilst 20% of the revenues is sent down the chain to the municipalites, the remainder has been dedicated to the newly-formed entity. These are denominated in Argentinean Pesos, whilst the $234 million issue is in dollars.
Salta needs the money because of a rapidly approaching call for debt repayment on $670 million of its existing debt, 40% of its total debt is due over the next three years. Whilst its revenues are generally healthy, the lengthening of debt profile and reasonably attractive cost of funding makes the choice an obvious one. Nevertheless a number of sovereign risks still remain.
The most important of these relate to the possibility of redirection of revenues, i.e. by ordering concessionaires to place revenues in an alternative account, or by attempting to access the Argentine collection account. Much of this risk is reduced by the probable unwillingness of the sovereign or sub-sovereign incurring the wrath of the global capital markets. There are also agreements telling the concessionaires to redirect payments to the new collection account and an offshore liquidity account, equal to six months interest payments.
The risk of the imposition of foreign currency controls is the responsibility of the Sovereign Risk Insurance policy, which covers 31 months' of interest payments and is worth $73 million. It covers the 15-year life of the bonds and is the first offering that uses the new capital markets product from Sovereign. Here, the primary consideration for the insurer is the condition of the country and provinces and the likelihood that they would take such a drastic step.
Devaluation is a less serious problem for bond investors since the accounts are typically paid into on a daily basis and well-head prices are calculated in dollars and then reconverted into Pesos, before being paid into the Trust. Moreover, amongst the 22 concessionaires, four corporates familiar to energy investors account for 87% of output and royalty income ? YPF (now part of Repsol YPF), Pluspetrol (45% owned by YPF), Techpetrol (owned by Techint) and Mobil Argentina (part of ExxonMobil).
The future performance of the reserves in the province also looks very healthy. BP Amoco and Royal Dutch/Shell, both of which are exploring in the area, could soon join the majors listed above, and performance risk, in the view of Fitch, looks minimal. Gas reserves look set to hold steady and if prices and the increase in demand from regional power plants continue to bloom then the economic fundamentals of the deal look strong. The bonds were rated Baa3 by Moody's Investors Service, BBB- by Fitch and BBB- by Standard & Poor's.
Nevertheless, closing the transaction was an exhausting process, as would befit a first. As one source close to the underwriters commented, ?this was a rare case of a securitization where there was no financial benefit to the obligors. This made due diligence a little bit harder?. There was a lengthy process of making all sides in the transaction familiar with the deal. Those most familiar with the transaction type, the insurers are engaged in intensive competition. Whilst Opic, with the TGN deal, and Zurich, with AES in El Salvador, have concentrated on corporates, Sovereign's involvement with the less familiar quasi-sovereign is noteworthy.
Bookrunners for the deal were Lehman Brothers, Banco Macro and Banco Santander Centro Hispano. A source close to Lehman Brothers says that the deal was ?fairly successful, and we were encouraged that all through the crisis at the end of 2000 we had investors willing to do their credit work and understand the mechanics of the deal. Things looked pretty frightening for a while?. In the end the bonds went out to a ?reasonably eclectic group of the larger investors?, although there does not yet exist a large-scale market for these types of securities.
Most of those involved with the deal suggest that the structure could be adapted to corporate interests in projects in the country and the region. The greatest obstacle to a flood of deals coming out is the sheer time it takes to close such deals. A lesser frequency in currency and governmental crises might be a step in the right direction, but the mass of agreements and the fleets of lawyers surrounding this emerging structure is one reason why sponsors might remain shy of the structure. In Latin America, two years on from the last great crisis, things are still very much one step at a time.
Argentina is currently rated at BB/B1/BB (Fitch/Moody's/S&P) for foreign currency obligations and has been on a negative outlook since December 2000. Argentina has only begun to emerge from a prolonged recession and several companies have been suffering from a credit crunch. One of the few exceptions to this picture is the energy sector, where domestic corporates have been revelling in the recent oil price boom.
The structure of the local government system is such that provinces enjoy a great measure of autonomy, although all benefit from varying degrees of prosperity. Redistribution between the province is handled through a central federal grant, which has been fixed as part of President de la Rua's reform programme. In general, the provinces with the lower per capita incomes and poorer infrastructure have been those nearer the interior and fringes, although these are usually the areas with the best exploration prospects for oil and gas.
The Salta Hydrocarbon Trust has been formed to monetize the proceeds from the royalties that the Province of Salta receives from oil exploration. The Hydrocarbon Law fixes this at 12%, and the revenues are collected directly from concessionaires as a proportion of well-head cost. Whilst 20% of the revenues is sent down the chain to the municipalites, the remainder has been dedicated to the newly-formed entity. These are denominated in Argentinean Pesos, whilst the $234 million issue is in dollars.
Salta needs the money because of a rapidly approaching call for debt repayment on $670 million of its existing debt, 40% of its total debt is due over the next three years. Whilst its revenues are generally healthy, the lengthening of debt profile and reasonably attractive cost of funding makes the choice an obvious one. Nevertheless a number of sovereign risks still remain.
The most important of these relate to the possibility of redirection of revenues, i.e. by ordering concessionaires to place revenues in an alternative account, or by attempting to access the Argentine collection account. Much of this risk is reduced by the probable unwillingness of the sovereign or sub-sovereign incurring the wrath of the global capital markets. There are also agreements telling the concessionaires to redirect payments to the new collection account and an offshore liquidity account, equal to six months interest payments.
The risk of the imposition of foreign currency controls is the responsibility of the Sovereign Risk Insurance policy, which covers 31 months' of interest payments and is worth $73 million. It covers the 15-year life of the bonds and is the first offering that uses the new capital markets product from Sovereign. Here, the primary consideration for the insurer is the condition of the country and provinces and the likelihood that they would take such a drastic step.
Devaluation is a less serious problem for bond investors since the accounts are typically paid into on a daily basis and well-head prices are calculated in dollars and then reconverted into Pesos, before being paid into the Trust. Moreover, amongst the 22 concessionaires, four corporates familiar to energy investors account for 87% of output and royalty income ? YPF (now part of Repsol YPF), Pluspetrol (45% owned by YPF), Techpetrol (owned by Techint) and Mobil Argentina (part of ExxonMobil).
The future performance of the reserves in the province also looks very healthy. BP Amoco and Royal Dutch/Shell, both of which are exploring in the area, could soon join the majors listed above, and performance risk, in the view of Fitch, looks minimal. Gas reserves look set to hold steady and if prices and the increase in demand from regional power plants continue to bloom then the economic fundamentals of the deal look strong. The bonds were rated Baa3 by Moody's Investors Service, BBB- by Fitch and BBB- by Standard & Poor's.
Nevertheless, closing the transaction was an exhausting process, as would befit a first. As one source close to the underwriters commented, ?this was a rare case of a securitization where there was no financial benefit to the obligors. This made due diligence a little bit harder?. There was a lengthy process of making all sides in the transaction familiar with the deal. Those most familiar with the transaction type, the insurers are engaged in intensive competition. Whilst Opic, with the TGN deal, and Zurich, with AES in El Salvador, have concentrated on corporates, Sovereign's involvement with the less familiar quasi-sovereign is noteworthy.
Bookrunners for the deal were Lehman Brothers, Banco Macro and Banco Santander Centro Hispano. A source close to Lehman Brothers says that the deal was ?fairly successful, and we were encouraged that all through the crisis at the end of 2000 we had investors willing to do their credit work and understand the mechanics of the deal. Things looked pretty frightening for a while?. In the end the bonds went out to a ?reasonably eclectic group of the larger investors?, although there does not yet exist a large-scale market for these types of securities.
Most of those involved with the deal suggest that the structure could be adapted to corporate interests in projects in the country and the region. The greatest obstacle to a flood of deals coming out is the sheer time it takes to close such deals. A lesser frequency in currency and governmental crises might be a step in the right direction, but the mass of agreements and the fleets of lawyers surrounding this emerging structure is one reason why sponsors might remain shy of the structure. In Latin America, two years on from the last great crisis, things are still very much one step at a time.
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