Water torture
1999 saw a wave of privatizations in Latin America, but few of the
lucky bidders have decided to approach the loan markets to date.
The mixture of good quality concession-holders, a continuing
reluctance on the part of local offtakers to rationalise
themselves, and the move towards management- rather than
construction-based contracts, have all brought funding requirements
down. But central governments are not the only players in the
industry seeking to slim down their balance sheets.
Moreover, a new pack of sponsors are moving in to challenge the dominance of France-based Suez Lyonnaise des Eaux, through its Lyonnaise des Eaux subsidiary. Anglian Water and Enron subsidiary Azurix are two other major players to watch ? the former has returned after a short hiatus in activity in the region and the latter has been steadily building up a base in Argentina and Mexico. It has bought up water companies in both Mexico and Brazil, and is working on the Leon and Torreon concessions in conjunction with FYPSA Construcciones SA.
However the trend has moved away from the large-scale build-operate-transfer (BOT) projects that have dominated the market for the last few years. Multinational players, sensing that they are operating in a more mature environment, are now moving towards more flexible ? and lucrative ? models, of which one is a variant on the PPP model. This enables them to provide lower-cost, higher margin service contracts, rather than the capital-intensive treatment works provision that formerly made up the bulk of the deal flow.
One of the largest deals yet was the multilateral-supported Aguas Argentinas deal. Now nearly five years old, it was designed to demonstrate the ability of sponsors to tap large debt sources at a time of perceived sovereign risk. Suez, Aguas de Barcelona (Agbar) and Anglian Water, as main foreign shareholders, took advantage of the Obras sell-off to pick-up one of the most prized ? and certainly the largest ? concession areas in the region, that surrounding Buenos Aires. Whilst cities provide more exploitable economies of scale, Aguas can boast a 1.2 million rise in the numbers of drinking water customers.
Aguas has set itself a formidable series of spending targets, although much of the work must be done piecemeal, making hits on the international market impracticable. To this end it wanted to put together what would have been the first ever water securitization in the region. The proposed $100 million deal palls next to the $4.2 billion estimate for future lending requirements, but gives a few clues as to the options available to utilities in the region and the strength of local debt appetite.
Long-term capital markets solutions boil down to the acceptance of short-term debentures, usually at uneconomical pricing, or wrapped and unwrapped bonds. Aguas has also expressed an interest in Opic's new partial risk product, which insulates investors from convertibility risk and allows bonds to access cross-border tenors. Early feedback suggests that the fees that Opic are looking at are too high ? at least this was one drawback highlighted by those close to Aguas. Morgan Stanley Dean Witter, heavily involved in attempting to structure the deal, is thought to be pushing the deal to other regional corporates.
A few factors would make this outcome unlikely, however. The most important of these is that the utility in question must be the beneficiary of a rock-solid concession structure. Renegotiations in tariff structures are a common feature of water deals ? and tend to be even more politically loaded ? and Aguas is fortunate in that it was able to beat the offer recommended by the regulator (1.6%) and gain a 5% rise. Such renegotiations often come with extra strings (including increased promises of performance) attached, but for a transaction where strong and stable cashflows are a prerequisite, getting the raise through is essential.
The other must for a deal is a strong corporate history. This was one of the reasons why an early, unwrapped issue for Perez Companc went through ? albeit backed by a strong flow of oil receivables. Aguas benefits from a strong set of sponsors and an established operating history, and appears to be one of the less politically objectionable privatizations in the region. Moreover, its ability to approach this sort of investor would heighten the prospects for further dealings with the Inter-American Development Bank, last tapped for a $120 million credit.
The structure is not yet watertight: much of the economics of any deal would depend on Aguas' ability to escape large hits from municipal and withholding tax. The Argentinean government may also clamp down on the use of offshore vehicles to loop revenue streams outside of the country. But it remains one option for sourcing precious long-term debt in an as-yet shallow market. Aguas is definitely keeping this issue close to the launch pad.
Chile, on the other hand, has recently been gripped by take-over fever, with two large players seeing large changes in ownership in the last two months. Much of this activity has been down to Endesa's decision to get out of the water industry, by selling off strategic stakes belonging to subsidiary Enersis.
Anglian Water recently purchased partner Enersis' shares in Aguas Puerto, to give it a controlling interest in Esval, a water and wastewater company serving the country's north and west. Esval was the first privatisation in the country, and Anglian took a stake back in 1999. It has not yet settled on a single type of venture, partly because as yet International ventures, whilst in the majority in terms of customers served, do not yet account for more that 5% of group profits. And in cherry-picking the most lucrative concessions, it remains at the mercy of evolving privatization structures.
Enersis subsidiary Aguas de Cordilliera has been has been bought up Suez/Agbar joint venture Empresa Metropolitana de Obras Sanitarias (EMOS) for $193 million. It is probable that this sale would not have gone ahead without the influence of the local competition authorities, unhappy that Endesa has stakes in both the electricity and sanitation business in Santiago de Chile.
For EMOS the deal means that it can build up a strong enough balance sheet and robust enough cashflow to access the capital markets. Chilean tax regime notwithstanding, an EMOS securitization would be fairly practicable; a straight corporate issue, following the example of Gener, even more so.
According to Jean-Louis Chaussade, vice-president of the Latin American region at Lyonnais des Eaux, local capital markets access remains the number one debt option, where possible on a non-recourse basis. ?When you know you're going to be in a country for up to thirty years this remains the most important priority. We don't have a fixed position yet on the partial risk wrap, but we're more interested in the terms that we can get from the tariff structure relative to investment levels?, he says.
Even in the more developed areas, however, established operators would be loathe to shoulder the prohibitive costs of borrowing (often at a 30% premium), where they can usually use tariff renegotiations and management efficiencies to boost cashflow. In Argentina and Chile, with higher standards of living and comparatively stable regulatory environments this is usually achievable. ?If you can get an assurance on security of tenure, so much the better, although this may be expensive?, adds Chaussade.
Elsewhere, echoing much of southern Europe, concession financing is still a matter of analysing the creditworthiness of municipalities. The difference with Europe, however, is usually that the municipalities are not in a robust enough financial position to support anything but the smallest works. Colombia, for instance, is still very much dependent on a series of governmental and multilateral guarantees to bring investment in.
Even here, however, a number of developments may produce a faster rate of concession financing. One of these is the public sector infrastructure financing facility, a $300 million World Bank-banked, credit suitable for small-scale water projects. This was set up in 1997, carries a guarantee from the Colombian government, and aims to address the fact that only one-fifth of projected infrastructure spending has so far been achieved. It is possible, again that this can be accompanied by inconvertibility wraps, although Colombia's BB foreign currency rating and tense law and order situation present equally great difficulties.
Another area where Colombia may yet provide a lead is in the consolidation of municipalities. 12-year old Acuavalle, a 42-strong association of water providers, has managed to build up a reputation for financial responsibility by pooling resources, and tends to find raising local funds easier. Findeter, the country's local development bank, is keen for more to follow the example.
The big-ticket waterworks usually stick to the time-honoured BOT structures, such as Lyonnaise des Eaux' Saltire project on the Bogota River. And financing structures here are sewn up tight. Says Chaussade, ?we received very strong guarantees from the state, as well as IDB support on the borrowing and a nine-month reserve account.? In areas where political interference in tariff-setting is likely to be high (concessions have occasionally been lost), this structure will become the norm.
And the necessity for multilateral support shows no signs of receding, even in the more developed areas. On 15 August, Vivendi and FCC subsidiary Proactiva signed an agreement with the Catamarca province for a 30-year water and wastewater concession. The concession has been designed to maximise the share of revenues available to the provincial government ? Proactiva's bid came in at 0.15% of annual revenue above Urbaser's rival offer. The $50 million investment programme that forms part of the concession will not require a large scale lending requirement, especially since the World bank is providing an $8 million back-up facility.
The number one priority for all the international players is Brazil, which is beginning to move its infrastructure spending of the government's balance sheet. Brazil has been slower in this regard than in telecoms or power, a sign that political sensitivities will dog the government's attempts to auction off further areas, even with BNDES help. Suez has again been first into the market, with the recent Manaus acquisition ? the water company fetched $106 million on 4 July, and will need around $220 million in investment, although much of this will come through the BNDES.
Two more privatizations should follow the first over the next 12 months ? Embasa and Compesa ? although much more of the framework needs to be finalised. ?The one big country with strong opportunities is Brazil,? says Chaussade, adding ?we don't yet know how the structure and pricing will develop, but it will be the main country.? Thames Water's much-flagged plans for expansion in the region will live or die according to their progress in Brazil, and will probably depend on finding a reliable Hispanic partner.
In the mean time incumbent players will be taking the chance to strengthen their cashflows in existing businesses, making first-mover advantage all the more lethal. Chaussade highlights the two-tier approach to the region: ?in areas like Argentina and Chile we need to be sure that co-operation is working and profitable, both by increasing margins and making management more efficient. You can't change from a public to a private ethos in two years. Elsewhere we're pursuing the most robust and sensible concession structures that we can find?. And it is in the latter goal that the governments have not yet said their final word.
Moreover, a new pack of sponsors are moving in to challenge the dominance of France-based Suez Lyonnaise des Eaux, through its Lyonnaise des Eaux subsidiary. Anglian Water and Enron subsidiary Azurix are two other major players to watch ? the former has returned after a short hiatus in activity in the region and the latter has been steadily building up a base in Argentina and Mexico. It has bought up water companies in both Mexico and Brazil, and is working on the Leon and Torreon concessions in conjunction with FYPSA Construcciones SA.
However the trend has moved away from the large-scale build-operate-transfer (BOT) projects that have dominated the market for the last few years. Multinational players, sensing that they are operating in a more mature environment, are now moving towards more flexible ? and lucrative ? models, of which one is a variant on the PPP model. This enables them to provide lower-cost, higher margin service contracts, rather than the capital-intensive treatment works provision that formerly made up the bulk of the deal flow.
One of the largest deals yet was the multilateral-supported Aguas Argentinas deal. Now nearly five years old, it was designed to demonstrate the ability of sponsors to tap large debt sources at a time of perceived sovereign risk. Suez, Aguas de Barcelona (Agbar) and Anglian Water, as main foreign shareholders, took advantage of the Obras sell-off to pick-up one of the most prized ? and certainly the largest ? concession areas in the region, that surrounding Buenos Aires. Whilst cities provide more exploitable economies of scale, Aguas can boast a 1.2 million rise in the numbers of drinking water customers.
Aguas has set itself a formidable series of spending targets, although much of the work must be done piecemeal, making hits on the international market impracticable. To this end it wanted to put together what would have been the first ever water securitization in the region. The proposed $100 million deal palls next to the $4.2 billion estimate for future lending requirements, but gives a few clues as to the options available to utilities in the region and the strength of local debt appetite.
Long-term capital markets solutions boil down to the acceptance of short-term debentures, usually at uneconomical pricing, or wrapped and unwrapped bonds. Aguas has also expressed an interest in Opic's new partial risk product, which insulates investors from convertibility risk and allows bonds to access cross-border tenors. Early feedback suggests that the fees that Opic are looking at are too high ? at least this was one drawback highlighted by those close to Aguas. Morgan Stanley Dean Witter, heavily involved in attempting to structure the deal, is thought to be pushing the deal to other regional corporates.
A few factors would make this outcome unlikely, however. The most important of these is that the utility in question must be the beneficiary of a rock-solid concession structure. Renegotiations in tariff structures are a common feature of water deals ? and tend to be even more politically loaded ? and Aguas is fortunate in that it was able to beat the offer recommended by the regulator (1.6%) and gain a 5% rise. Such renegotiations often come with extra strings (including increased promises of performance) attached, but for a transaction where strong and stable cashflows are a prerequisite, getting the raise through is essential.
The other must for a deal is a strong corporate history. This was one of the reasons why an early, unwrapped issue for Perez Companc went through ? albeit backed by a strong flow of oil receivables. Aguas benefits from a strong set of sponsors and an established operating history, and appears to be one of the less politically objectionable privatizations in the region. Moreover, its ability to approach this sort of investor would heighten the prospects for further dealings with the Inter-American Development Bank, last tapped for a $120 million credit.
The structure is not yet watertight: much of the economics of any deal would depend on Aguas' ability to escape large hits from municipal and withholding tax. The Argentinean government may also clamp down on the use of offshore vehicles to loop revenue streams outside of the country. But it remains one option for sourcing precious long-term debt in an as-yet shallow market. Aguas is definitely keeping this issue close to the launch pad.
Chile, on the other hand, has recently been gripped by take-over fever, with two large players seeing large changes in ownership in the last two months. Much of this activity has been down to Endesa's decision to get out of the water industry, by selling off strategic stakes belonging to subsidiary Enersis.
Anglian Water recently purchased partner Enersis' shares in Aguas Puerto, to give it a controlling interest in Esval, a water and wastewater company serving the country's north and west. Esval was the first privatisation in the country, and Anglian took a stake back in 1999. It has not yet settled on a single type of venture, partly because as yet International ventures, whilst in the majority in terms of customers served, do not yet account for more that 5% of group profits. And in cherry-picking the most lucrative concessions, it remains at the mercy of evolving privatization structures.
Enersis subsidiary Aguas de Cordilliera has been has been bought up Suez/Agbar joint venture Empresa Metropolitana de Obras Sanitarias (EMOS) for $193 million. It is probable that this sale would not have gone ahead without the influence of the local competition authorities, unhappy that Endesa has stakes in both the electricity and sanitation business in Santiago de Chile.
For EMOS the deal means that it can build up a strong enough balance sheet and robust enough cashflow to access the capital markets. Chilean tax regime notwithstanding, an EMOS securitization would be fairly practicable; a straight corporate issue, following the example of Gener, even more so.
According to Jean-Louis Chaussade, vice-president of the Latin American region at Lyonnais des Eaux, local capital markets access remains the number one debt option, where possible on a non-recourse basis. ?When you know you're going to be in a country for up to thirty years this remains the most important priority. We don't have a fixed position yet on the partial risk wrap, but we're more interested in the terms that we can get from the tariff structure relative to investment levels?, he says.
Even in the more developed areas, however, established operators would be loathe to shoulder the prohibitive costs of borrowing (often at a 30% premium), where they can usually use tariff renegotiations and management efficiencies to boost cashflow. In Argentina and Chile, with higher standards of living and comparatively stable regulatory environments this is usually achievable. ?If you can get an assurance on security of tenure, so much the better, although this may be expensive?, adds Chaussade.
Elsewhere, echoing much of southern Europe, concession financing is still a matter of analysing the creditworthiness of municipalities. The difference with Europe, however, is usually that the municipalities are not in a robust enough financial position to support anything but the smallest works. Colombia, for instance, is still very much dependent on a series of governmental and multilateral guarantees to bring investment in.
Even here, however, a number of developments may produce a faster rate of concession financing. One of these is the public sector infrastructure financing facility, a $300 million World Bank-banked, credit suitable for small-scale water projects. This was set up in 1997, carries a guarantee from the Colombian government, and aims to address the fact that only one-fifth of projected infrastructure spending has so far been achieved. It is possible, again that this can be accompanied by inconvertibility wraps, although Colombia's BB foreign currency rating and tense law and order situation present equally great difficulties.
Another area where Colombia may yet provide a lead is in the consolidation of municipalities. 12-year old Acuavalle, a 42-strong association of water providers, has managed to build up a reputation for financial responsibility by pooling resources, and tends to find raising local funds easier. Findeter, the country's local development bank, is keen for more to follow the example.
The big-ticket waterworks usually stick to the time-honoured BOT structures, such as Lyonnaise des Eaux' Saltire project on the Bogota River. And financing structures here are sewn up tight. Says Chaussade, ?we received very strong guarantees from the state, as well as IDB support on the borrowing and a nine-month reserve account.? In areas where political interference in tariff-setting is likely to be high (concessions have occasionally been lost), this structure will become the norm.
And the necessity for multilateral support shows no signs of receding, even in the more developed areas. On 15 August, Vivendi and FCC subsidiary Proactiva signed an agreement with the Catamarca province for a 30-year water and wastewater concession. The concession has been designed to maximise the share of revenues available to the provincial government ? Proactiva's bid came in at 0.15% of annual revenue above Urbaser's rival offer. The $50 million investment programme that forms part of the concession will not require a large scale lending requirement, especially since the World bank is providing an $8 million back-up facility.
The number one priority for all the international players is Brazil, which is beginning to move its infrastructure spending of the government's balance sheet. Brazil has been slower in this regard than in telecoms or power, a sign that political sensitivities will dog the government's attempts to auction off further areas, even with BNDES help. Suez has again been first into the market, with the recent Manaus acquisition ? the water company fetched $106 million on 4 July, and will need around $220 million in investment, although much of this will come through the BNDES.
Two more privatizations should follow the first over the next 12 months ? Embasa and Compesa ? although much more of the framework needs to be finalised. ?The one big country with strong opportunities is Brazil,? says Chaussade, adding ?we don't yet know how the structure and pricing will develop, but it will be the main country.? Thames Water's much-flagged plans for expansion in the region will live or die according to their progress in Brazil, and will probably depend on finding a reliable Hispanic partner.
In the mean time incumbent players will be taking the chance to strengthen their cashflows in existing businesses, making first-mover advantage all the more lethal. Chaussade highlights the two-tier approach to the region: ?in areas like Argentina and Chile we need to be sure that co-operation is working and profitable, both by increasing margins and making management more efficient. You can't change from a public to a private ethos in two years. Elsewhere we're pursuing the most robust and sensible concession structures that we can find?. And it is in the latter goal that the governments have not yet said their final word.
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