Mexican Power roundtable
The nearest thing to a consensus at Project Finance's Mexican Power
Roundtable was that the future direction of Mexico's new government
would not affect dealflow in the near-term. At least in part this
optimism stems from the industrial customers, whose increased
demand will shape the country's IPP programme as much as any
restructuring of the country's electricity monolith, the CFE. In
fact the day almost turned into a debate over the merits of the two
templates for bringing the private offtaker into the country's
industry.
The Bajio and TEG deals represent two schools of thought about how far to rely upon industrial credits in an evolving power industry. Which becomes most successful as a template depends upon two, related events, the first of which is largely political. Vincente Fox, the incoming president, has largely ruled out the possibility of privatizing the CFE (or Commission Federal de Electricidad) in the near future. He does not, however, have to guarantee its monopoly, and appears to be more willing to move towards an opening of access than in the case of Pemex, the oil and gas giant.
The consensus figure is that the country at large is still facing a demand boom, driven by growth of up to 7%, according to Darrel Ho at Deutsche Bank: ?down the road if Mexico can develop a sufficiently robust independent transmission system and wholesale electricity market, new offtake structures could emerge?. It is here that new players acting both as lenders and borrowers can get into the market, if prepared to be creative enough.
Moreover, allowing industrial customers to purchase their electricity directly from the generators has not required an alteration to the constitution, something that Fox' following in the Mexican legislature would find difficult to achieve. All that stands in the way of large numbers of large Mexican corporates opting out of the CFE system is their own creditworthiness. First indications are that size of the remaining pool of offtakers, both individually and in aggregate, will be small.
Roundtable participants came back to this theme repeatedly. David Wasserman, vice-president, Development at TEG-sponsors Sithe Energies, explains its rationale: ?the reason why we've gone to the top-tier corporates is that they're the ones that can be financed right now. There are probably a dozen or so out there whose ratings would go straight up after a sovereign upgrade?.
TEG, to recap, was a 100% private sector deal, with cement producer Cemex providing the site and the fuel, and taking all of the plant's output. TEG II saw silver producer Penoles taking all of the output of additional units at the Tamuin site. Because both offtake obligations are long-term and backed by strong corporates, the banks (ABN Amro, Deutsche, Credit Agricole Indosuez and ANZ) were prepared to lend against these obligations. For Bajio, InterGen has the bedrock of a CFE PPA, but the additional capacity designed for industrial purchasers is not yet backed by PPAs, only projected short bilateral contracts. InterGen has had to guarantee the portion of the debt relating to these.
Whilst TEG is a classic, long-term PPA-backed deal featuring limited recourse provisions, Bajio is a step back in terms of sponsor guarantees. It does benefit from cheap capital because of a US Exim comprehensive guarantee, and can be shunted through the Citibank Govco CP conduit. Self-supply will probably not be the decisive factor in solving Mexico's energy needs however.
Antonio Souza, head of the Energy area at Protego (a Mexican advisory firm), despite a long history of involvement in both types of deal, is already looking ahead to the new landscape. ?We're now talking about the B Plan [the successor to the previous Zedillo administration's proposals]. The name of the game is making the CFE creditworthy so that it can be attractive on a standalone basis?, he says. ?There are only a handful of companies with the size of demand to justify self-generation, so you'll be looking at a new breed of IPPs?.
The new breed will come with less onerous provisions regarding site and size of any facility and will be awarded largely on price. This will come as a relief to many sponsors frustrated by the complexities of the bid process. As Paula Priestley from El Paso Energy says, ?when entering the process, you have to spend a long time looking at your strategy. The CFE process is transparent and constructive, but unforeseen constraints will be a part of it?. Yves Maugen from Electricite de France adds ?the bid process has been managed mostly by technical issues, for instance whether you can get your turbines at reasonable prices. But people are now looking at more creative ways to win the bid?.
Wasserman broadly agrees, with the caveat that ?the CFE hasn't put out an unreasonable bid where they couldn't get 2 or 3 financeable offers, ?. As to whether the transition team appointed by Fox to look at the industry will affect bids, there are not yet many signs of change. As one audience member put it ?although the bid process is transparent, it is cumbersome. The CFE is not obligated to accept a bid once it has been put out to tender. Sponsors can end up spending a lot of money?. One way to depoliticize the process would be to turn the awarding bodies into parastatal entities, outside of the Ley de Bienes Nacionales, the most difficult part of Mexican law to reform, suggests Souza.
Several proposed plants have been rebid after dissatisfaction with the offers received, including Tuxpan, where Union Fenosa emerged as front-runner after a protracted battle with Iberdrola. Even Bajio was rebid twice. El Paso and AES will have to submit new bids on the Chihuahua III plant. The usual, albeit unspoken, sentiment that European sponsors tend to benefit from a lower cost of capital, is becoming less important as both borrowers have to perform a more rigorous analysis of the private offtaker.
Jean-Francois Grandchamp, Credit Agricole Indosuez' New York Project Finance head, believes that ?with private offtakers you have to look at the rationale behind their electricity use. It's also a question of diversifying risk amongst assets?. At the moment this refers to the different facilities served by a self-supply project such as the two TEG phases. In the future it will probably be necessary to pitch a number of smaller, sub 50-MW consumers and then aggregate their needs in a single plant, much as Iberdrola and, more recently, Enron have done.
This diversity is useful, although it brings with it a greater number of weaker credits. The tribulations of Tribasa, a construction and transport group brought low by indebtedness as much as currency mismatches, are one obvious example. Says Souza, ?In the case of self generation deals the offtake is being driven by a mix of top corporates with demand greater than 100MW ? Cemex, Peñoles, Vitro, IMSA, Grupo Mexico and Ispat ? but soon you will have to look at aggregation of load to assure the economical sizes of Power Plants. The interesting one is Pemex, because there are big steam sinks there and you can be more imaginative?.
But Pemex is the main source of concern for those seeking to find reliable and low cost gas. And it is not yet a confirmed fan of long-term off-balance sheet financing. Of more immediate concern is its effect on IPPs, whether private or with the CFE. Barry Machlin, global co-head of Project Finance at Mayer Brown & Platt sees it as another layer of frustration: ?it has the potential to land us back where we've been before with mismatching and the lack of associated infrastructure. When dealing with two competing bureaucracies and trying to get them to meet in the middle, guess who's going to get squeezed??
Alternatives exist in petcoke, produced from the Pemex refinery upgrades, or imported from Houston, as well as, possibly coal, about which little has been heard but which could make a comeback if new emissions technologies reach wider acceptance. There were few participants willing to go long on gas prices, however, so circulating fluidised bed generation specialists like TEG-sponsors Alstom should keep an eye open.
Finding new risk-takers in the Mexican market will be the next main challenge for the transition team and new energy ministry. As Grandchamp points out ?the universe that produces funds is limited largely to European banks. The situation has got better, but the universe has not grown. Even the best signature in the business can't go on signing forever?. Tapping long-dated institutional debt will not be possible without an end to the split rating or serious marketing by the credit enhancement institutions.
Machlin notes that the IFC and IDB are repoertedly largely closed out on the Mexican power market, but the possibility that the latter could bring its partial risk wrap to bear on a bond issue is high. Banco Santander Centro Hispano is one institution believed to be examining closely the possibility for a cross-border financing of this type. US Exim, represented by Donald Hultman, remains open for business: ?we're a demand-driven institution, and our exposure to the country is not yet near where it could be. We'd even be prepared to do an all-covered deal?. Exim, in common with other ECAs, is moving closer to adopting more straightforward cofinancing arrangements ? subject to domestic political approval. Gregoire Leforestier, senior project manager at Coface, says that ?the ECAs have definitely become more flexible, and you can now use multisource financing for most project elements?.
Exim's cover gives the opportunity for sponsors to tap the growing commercial paper market ? Citibank for one has a number of conduits suitable for placing highly-rated energy deals. It may be possible, through cofinancing and reinsurance, for other ECAs to follow suit. Even a privately wrapped issue could break through the sovereign ceiling and qualify, following on from the NGL-4 template in Qatar, arranged by WestLB and Greenwich NatWest. Here, MBIA and Ambac wraps gave a note issue from a gas project in the country the rating necessary to go through both banks' commercial paper programmes.
Zurich Emerging Markets Solutions is the fastest in responding to the products introduced by the multilaterals. Edward Coppola, vice-president and chief underwriting officer, says that since the first product, introduced by Opic, Zurich has carried out about six capital markets transactions, including one for AES in El Salvador. ?What we have found is that even a small amount and a limited scope of insurance can significantly enhance the rating of a bond issue. We're getting a quite few inquiries right now, and an end to the split rating would bring more in. We do not see ourselves in competition with the multilaterals ? in fact we have worked very closely with them in applying facultative reinsurance.?
What is clear is that local currency liquidity simply does not exist for power projects. As Souza points out, ?Many local institutions do have the balance sheets, but they don't have the comsumption levels or the appetite and expertise for stand alone self generation projects?. Jorge Cervantes Trejo from Mexican law firm Jáuregui, Navarrete, Nader y Rojas adds that ?the only parties that could provide the funds are pension funds and insurance companies ? and this would require a change in regulations?.
Proactive intervention by the Mexican government in stimulating the Mexican bond market, along the lines of Chile's recent efforts, is some way off. For the moment the situation for borrowers in local currency is summed up by Sithe's Wasserman as ?if you want to borrow in Pesos then you have to pay high Peso interest rates, for short tenors?. Whilst CFE denominates its PPAs in dollars and the self-supply projects attractive to sponsors are those with dollar rich corporates as offtakers, this is hardly an issue.
The attitude towards the two templates from the Mexican government would be one of the chief determinants of their success. There is as yet little hostility towards sponsors oversizing or adding another turbine to improve their economics. Market observers will be keenly checking reaction to InterGen's next move, where overaggregation will support a cross-border fuel conversion agreement with PG&E (should it still be solvent by then). If public opinion can live with Mexico dealing with the extra emissions, in a way that Florida is as yet unable, then an informal merchant market for industrials will emerge.
Meanwhile, Enron's Monterrey deal has shown that TEG can be adapted to using gas, albeit with apparently stronger guarantees. Most of the exciting developments in the market will wait for an upgrade by Standard & Poor's, and with it the pension funds, insurers and bond salesman that will head south in its wake. n
Roundtable participants:
Moderator: Luis Ernesto Martinez-Alas, Vice President/Senior Credit Officer, Sovereign Risk Unit, Moody's Investors Service
Edward A. Coppola, Vice President and Chief Underwriting Officer, Zurich Emerging Markets Solutions
Jean-François Grandchamp, First Vice President at Crédit Agricole Indosuez
Darrel Ho, Vice President, Deutsche Banc Alex. Brown, New York
Donald Hultman ? US Exim
Grégoire Leforestier, Senior Project Manager ? COFACE
Barry N. Machlin, Partner and Co-Chair, Global Project Finance Group, Mayer, Brown & Platt
David Wasserman, Vice President ? Development, Sithe Energies, Inc.
The Bajio and TEG deals represent two schools of thought about how far to rely upon industrial credits in an evolving power industry. Which becomes most successful as a template depends upon two, related events, the first of which is largely political. Vincente Fox, the incoming president, has largely ruled out the possibility of privatizing the CFE (or Commission Federal de Electricidad) in the near future. He does not, however, have to guarantee its monopoly, and appears to be more willing to move towards an opening of access than in the case of Pemex, the oil and gas giant.
The consensus figure is that the country at large is still facing a demand boom, driven by growth of up to 7%, according to Darrel Ho at Deutsche Bank: ?down the road if Mexico can develop a sufficiently robust independent transmission system and wholesale electricity market, new offtake structures could emerge?. It is here that new players acting both as lenders and borrowers can get into the market, if prepared to be creative enough.
Moreover, allowing industrial customers to purchase their electricity directly from the generators has not required an alteration to the constitution, something that Fox' following in the Mexican legislature would find difficult to achieve. All that stands in the way of large numbers of large Mexican corporates opting out of the CFE system is their own creditworthiness. First indications are that size of the remaining pool of offtakers, both individually and in aggregate, will be small.
Roundtable participants came back to this theme repeatedly. David Wasserman, vice-president, Development at TEG-sponsors Sithe Energies, explains its rationale: ?the reason why we've gone to the top-tier corporates is that they're the ones that can be financed right now. There are probably a dozen or so out there whose ratings would go straight up after a sovereign upgrade?.
TEG, to recap, was a 100% private sector deal, with cement producer Cemex providing the site and the fuel, and taking all of the plant's output. TEG II saw silver producer Penoles taking all of the output of additional units at the Tamuin site. Because both offtake obligations are long-term and backed by strong corporates, the banks (ABN Amro, Deutsche, Credit Agricole Indosuez and ANZ) were prepared to lend against these obligations. For Bajio, InterGen has the bedrock of a CFE PPA, but the additional capacity designed for industrial purchasers is not yet backed by PPAs, only projected short bilateral contracts. InterGen has had to guarantee the portion of the debt relating to these.
Whilst TEG is a classic, long-term PPA-backed deal featuring limited recourse provisions, Bajio is a step back in terms of sponsor guarantees. It does benefit from cheap capital because of a US Exim comprehensive guarantee, and can be shunted through the Citibank Govco CP conduit. Self-supply will probably not be the decisive factor in solving Mexico's energy needs however.
Antonio Souza, head of the Energy area at Protego (a Mexican advisory firm), despite a long history of involvement in both types of deal, is already looking ahead to the new landscape. ?We're now talking about the B Plan [the successor to the previous Zedillo administration's proposals]. The name of the game is making the CFE creditworthy so that it can be attractive on a standalone basis?, he says. ?There are only a handful of companies with the size of demand to justify self-generation, so you'll be looking at a new breed of IPPs?.
The new breed will come with less onerous provisions regarding site and size of any facility and will be awarded largely on price. This will come as a relief to many sponsors frustrated by the complexities of the bid process. As Paula Priestley from El Paso Energy says, ?when entering the process, you have to spend a long time looking at your strategy. The CFE process is transparent and constructive, but unforeseen constraints will be a part of it?. Yves Maugen from Electricite de France adds ?the bid process has been managed mostly by technical issues, for instance whether you can get your turbines at reasonable prices. But people are now looking at more creative ways to win the bid?.
Wasserman broadly agrees, with the caveat that ?the CFE hasn't put out an unreasonable bid where they couldn't get 2 or 3 financeable offers, ?. As to whether the transition team appointed by Fox to look at the industry will affect bids, there are not yet many signs of change. As one audience member put it ?although the bid process is transparent, it is cumbersome. The CFE is not obligated to accept a bid once it has been put out to tender. Sponsors can end up spending a lot of money?. One way to depoliticize the process would be to turn the awarding bodies into parastatal entities, outside of the Ley de Bienes Nacionales, the most difficult part of Mexican law to reform, suggests Souza.
Several proposed plants have been rebid after dissatisfaction with the offers received, including Tuxpan, where Union Fenosa emerged as front-runner after a protracted battle with Iberdrola. Even Bajio was rebid twice. El Paso and AES will have to submit new bids on the Chihuahua III plant. The usual, albeit unspoken, sentiment that European sponsors tend to benefit from a lower cost of capital, is becoming less important as both borrowers have to perform a more rigorous analysis of the private offtaker.
Jean-Francois Grandchamp, Credit Agricole Indosuez' New York Project Finance head, believes that ?with private offtakers you have to look at the rationale behind their electricity use. It's also a question of diversifying risk amongst assets?. At the moment this refers to the different facilities served by a self-supply project such as the two TEG phases. In the future it will probably be necessary to pitch a number of smaller, sub 50-MW consumers and then aggregate their needs in a single plant, much as Iberdrola and, more recently, Enron have done.
This diversity is useful, although it brings with it a greater number of weaker credits. The tribulations of Tribasa, a construction and transport group brought low by indebtedness as much as currency mismatches, are one obvious example. Says Souza, ?In the case of self generation deals the offtake is being driven by a mix of top corporates with demand greater than 100MW ? Cemex, Peñoles, Vitro, IMSA, Grupo Mexico and Ispat ? but soon you will have to look at aggregation of load to assure the economical sizes of Power Plants. The interesting one is Pemex, because there are big steam sinks there and you can be more imaginative?.
But Pemex is the main source of concern for those seeking to find reliable and low cost gas. And it is not yet a confirmed fan of long-term off-balance sheet financing. Of more immediate concern is its effect on IPPs, whether private or with the CFE. Barry Machlin, global co-head of Project Finance at Mayer Brown & Platt sees it as another layer of frustration: ?it has the potential to land us back where we've been before with mismatching and the lack of associated infrastructure. When dealing with two competing bureaucracies and trying to get them to meet in the middle, guess who's going to get squeezed??
Alternatives exist in petcoke, produced from the Pemex refinery upgrades, or imported from Houston, as well as, possibly coal, about which little has been heard but which could make a comeback if new emissions technologies reach wider acceptance. There were few participants willing to go long on gas prices, however, so circulating fluidised bed generation specialists like TEG-sponsors Alstom should keep an eye open.
Finding new risk-takers in the Mexican market will be the next main challenge for the transition team and new energy ministry. As Grandchamp points out ?the universe that produces funds is limited largely to European banks. The situation has got better, but the universe has not grown. Even the best signature in the business can't go on signing forever?. Tapping long-dated institutional debt will not be possible without an end to the split rating or serious marketing by the credit enhancement institutions.
Machlin notes that the IFC and IDB are repoertedly largely closed out on the Mexican power market, but the possibility that the latter could bring its partial risk wrap to bear on a bond issue is high. Banco Santander Centro Hispano is one institution believed to be examining closely the possibility for a cross-border financing of this type. US Exim, represented by Donald Hultman, remains open for business: ?we're a demand-driven institution, and our exposure to the country is not yet near where it could be. We'd even be prepared to do an all-covered deal?. Exim, in common with other ECAs, is moving closer to adopting more straightforward cofinancing arrangements ? subject to domestic political approval. Gregoire Leforestier, senior project manager at Coface, says that ?the ECAs have definitely become more flexible, and you can now use multisource financing for most project elements?.
Exim's cover gives the opportunity for sponsors to tap the growing commercial paper market ? Citibank for one has a number of conduits suitable for placing highly-rated energy deals. It may be possible, through cofinancing and reinsurance, for other ECAs to follow suit. Even a privately wrapped issue could break through the sovereign ceiling and qualify, following on from the NGL-4 template in Qatar, arranged by WestLB and Greenwich NatWest. Here, MBIA and Ambac wraps gave a note issue from a gas project in the country the rating necessary to go through both banks' commercial paper programmes.
Zurich Emerging Markets Solutions is the fastest in responding to the products introduced by the multilaterals. Edward Coppola, vice-president and chief underwriting officer, says that since the first product, introduced by Opic, Zurich has carried out about six capital markets transactions, including one for AES in El Salvador. ?What we have found is that even a small amount and a limited scope of insurance can significantly enhance the rating of a bond issue. We're getting a quite few inquiries right now, and an end to the split rating would bring more in. We do not see ourselves in competition with the multilaterals ? in fact we have worked very closely with them in applying facultative reinsurance.?
What is clear is that local currency liquidity simply does not exist for power projects. As Souza points out, ?Many local institutions do have the balance sheets, but they don't have the comsumption levels or the appetite and expertise for stand alone self generation projects?. Jorge Cervantes Trejo from Mexican law firm Jáuregui, Navarrete, Nader y Rojas adds that ?the only parties that could provide the funds are pension funds and insurance companies ? and this would require a change in regulations?.
Proactive intervention by the Mexican government in stimulating the Mexican bond market, along the lines of Chile's recent efforts, is some way off. For the moment the situation for borrowers in local currency is summed up by Sithe's Wasserman as ?if you want to borrow in Pesos then you have to pay high Peso interest rates, for short tenors?. Whilst CFE denominates its PPAs in dollars and the self-supply projects attractive to sponsors are those with dollar rich corporates as offtakers, this is hardly an issue.
The attitude towards the two templates from the Mexican government would be one of the chief determinants of their success. There is as yet little hostility towards sponsors oversizing or adding another turbine to improve their economics. Market observers will be keenly checking reaction to InterGen's next move, where overaggregation will support a cross-border fuel conversion agreement with PG&E (should it still be solvent by then). If public opinion can live with Mexico dealing with the extra emissions, in a way that Florida is as yet unable, then an informal merchant market for industrials will emerge.
Meanwhile, Enron's Monterrey deal has shown that TEG can be adapted to using gas, albeit with apparently stronger guarantees. Most of the exciting developments in the market will wait for an upgrade by Standard & Poor's, and with it the pension funds, insurers and bond salesman that will head south in its wake. n
Roundtable participants:
Moderator: Luis Ernesto Martinez-Alas, Vice President/Senior Credit Officer, Sovereign Risk Unit, Moody's Investors Service
Edward A. Coppola, Vice President and Chief Underwriting Officer, Zurich Emerging Markets Solutions
Jean-François Grandchamp, First Vice President at Crédit Agricole Indosuez
Darrel Ho, Vice President, Deutsche Banc Alex. Brown, New York
Donald Hultman ? US Exim
Grégoire Leforestier, Senior Project Manager ? COFACE
Barry N. Machlin, Partner and Co-Chair, Global Project Finance Group, Mayer, Brown & Platt
David Wasserman, Vice President ? Development, Sithe Energies, Inc.
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