Surviving the storm
Tension is mounting in Latin America. While some sponsors are
taking a wait-and-see stance to the financing of thier projects a
few are bold enough to go to the capital markets among them are
YPF, Petrobras and Dow Chemical ? sponsors of the Companhia Mega
natural gas separation plant, pipeline and fractionation facility
in Argentina. Together with Credit Suisse First Boston and
Citibank/Salomon Smith Barney, the sponsors are preparing to launch
a $685 million bond issue to finance the construction of the plant.
Financing will be split between $485 million in loan-style FRNs and
$200 million in private placement notes. The project will produce
three primary commodities ? ethane, natural gasoline and a liquid
petroleum gas (LPG) mix.
?The good news is that, while entire regions were painted with a broad brush last year, investors are now beginning to recognise the good sovereign and project credits within each region?, says John Laxmi, managing director of Citibank's global project finance group in New York. ?The result is that Chile, Argentina and Mexico are differentiated from Brazil, Venezuela and other Latin American countries. Investors are also starting to appreciate that each project should be looked at through the specific factors that affect that project's credit, which means that well structured deals should be able to get to market.?
Mega broke the sovereign ceiling receiving ratings of triple-B minus from Standard & Poors and Duff & Phelps. Such a good rating relates to the fact that sponsors will be providing completion guarantees to the project, as well as guaranteeing the fuel supply and the offtake of the commodities. Foreign currency transfer and convertibility risks are mitigated by offshore accounts that collect US dollar denominated payments for the commodities.
?One of the main strengths of the deal is the importance of the project's production for Argentina's ethylene and Brazil's LPG domestic consumption needs?, says Caren Chang, project analyst at Duff & Phelps in Chicago. ?This essentially makes the project an operating expense for Petrobras and, to a lesser extent, for YPF. So cashflow payments to the project are likely to receive a higher priority during a crisis situation given the opportunity cost of these commodities for the sponsors.?
A year to remember
1998 was a tough year for all sponsors, contractors and financiers involved in the development of projects in Latin America. Economic slowdown in Asia reduced world demand and lowered prices for many of the commodities which Latin America exports. Oil, petrochemicals, copper and gold prices have reached an almost 20-year historical low, which has hurt many projects involved in the development of the region's natural resources.
The reduction in hard currency generated by these projects limited the cashflow available to service related debt. And increased concerns about credit risk and potential devaluations pushed capital markets investors away from Latin America.
Secondary market spreads over the benchmark rate widened dramatically for all emerging markets debt following Russia's default on its rouble debt on August 17. During that week, spreads on JP Morgan's benchmark emerging market bond index widened by almost 500 basis points to stand at 1,560bp over Treasuries.
The spreads on Conproca's $370 million bond, issued to finance the upgrade of Pemex's Cadereyta refinery in Mexico, surged from 450bp at launch to 1,100 basis in October, corresponding to the near shutdown in the capital markets.
Despite the contraction in the banking industry, low commodity prices, sovereign credit downgrades and fickle investor appetite, some projects were able to tap the bond market successfully. Sponsors took advantage of a narrow issuance window opening from March to June. Fertinitro Finance, Monterrey Power, Proyectos de Energia, Phoenix Park Funding and Cerro Negro Finance are examples of bonds which came to market during this period.
Fertinitro was the first emerging market petrochemical project to tap the bond market since the Asian crisis. Sponsors Koch Industries, Pequiven, Snamprogetti and Empresas Polar funded construction of their fertiliser plant in Venezuela through a $560 million loan and a $250 million, 22-year Rule 144A bond led by Citibank. The bond closed oversubscribed and earned an investment-grade rating of Baa3 from Moody's and BBB+ from Duff & Phelps. The project is expected to be one of the lowest cost producers of urea and ammonia worldwide.
But Venezuela's low oil price environment and growing concerns ensuing from the country's political elections contributed to the downgrade of Venezuela's sovereign rating to BB?, and later to B+. These factors heightened the risks for interests in Venezuela's energy sector and meant the downgrade for the debt securities of three projects involved in developing the country's extra-heavy crude oil reserves ? Petrozuata, Cerro Negro and Sincor ? as well as the downgrade for Fertinitro shortly after.
Other Venezuelan deals have stalled. Sincor's $1.5 billion bond issue, due to accompany $1.2 billion in bank financing for the oilfield project, was pulled due to the unpalatable spreads required to make the deal work. Sponsors PDVSA and Total had to invest a hefty $1.9 billion in equity to keep the project on track.
The $200 million Rule 144A bond, mandated to Credit Suisse First Boston, to finance Placer Dome's Las Cristinas gold mine was also cancelled due to low metal prices, poor market conditions and a pressing construction schedule.
What's next?
So what will happen in 1999? John Laxmi says: ?The determining factors for issuing bonds to finance Latin American are the economic outlook and currency outlook for the countries in the region. This covers, for example, the outlook for oil prices1 and the extent to which problems in Brazil could extend to other countries in the region.?
The Brazilian time-bomb exploded in January when President Cardoso decided to float the Real after devaluating it by 8%. Concerns over Brazil's ability to implement the IMF programme to reduce the budget deficit caused a large capital flight from the country and the currency dropped by 41%. Brazilian companies and utilities with large dollar debt have been hit hardest and many have been forced to revert to domestic markets for funds or to roll over debt due this year.
The result is that most Latin American issuance, unless credit-enhanced, are unlikely to find any favour until there are much clearer signs of progress on the Brazilian financial and economic front.
But there is hope. The successful financing of the Santiago international airport in Chile through a $213 million Rule 144A bond has shown that bonds wrapped by an insurance guarantee can get to market. ?The MBIA insurance guarantee wrap made the difference between certain investors looking at the bonds or not,? says Barry Gold, director at Salomon Smith Barney in New York. ?We used this structure because we needed to close by year-end, during a very difficult fourth quarter. It allowed us to attract a much broader investor base as they were essentially looking at a triple-A guaranteed security which happened to have an underlying Latin American credit.?
Resorting to domestic borrowing may be another solution for projects earning revenues in local currency. A joint venture of Tribasa, Grupo Ferrovial and Constructora Delta are ready to issue Chile's first domestic project bond to finance the construction and operation of the Talca to Chillan section of Chile's Ruta 5 tollroad. Banco Santander holds the books for the $150 million peso-denominated bond wrapped by the MBIA-AMBAC insurance guarantee.
Opic takes the lead
There could also be some positive signs from the export credit agencies. Others forms of credit enhancement which may emerge this year include Opic's extension of its political risk cover for project bonds. This product will cover political risks such as violence, expropriation and currency inconvertibility together with the existing partial risk guarantee offered by multilateral development banks. ?By providing political risk cover on bonds, development banks could be bridging a gap by allowing viable emerging market projects to receive a higher debt rating and access the capital markets when financing would otherwise be unavailable?, says Barry Gold.
Projects under consideration by Opic include an offshore oil project in Africa, a small business project in Turkey and a gas-processing project in Venezuela. The Venezuelan project is the $450 million ACCRO III & IV gas-processing complex being developed by Transcanada Pipelines, Enron International and Tecnoconsult. Financing for the project will consist of a loan and an Opic-guaranteed Rule 144A led by Merrill Lynch.
Other deals that have been delayed and are expected to launch in 1999, include: Sincor's $1.5 billion bond, a $600 million Euro/144A bond for the Marlim oilfield in Brazil, $250 million in Eurobonds for the Gasandes pipeline in Chile, Petrodrill's $1 billion bond for an offshore drilling rig in Brazil and a $180 million bond for Entergy's Chinay and Yanango power plants in Peru.
Also in the pipeline are more than $12 billion-worth of new holding companies resulting from the auctions of Brazil's Telebras system and power assets. Only a few of these have bridge facilities in place, while most of them have paid for their acquisitions entirely through equity. Once the dust settles, these companies will eventually come to market to seek permanent financing.
Project Mega
Country: Argentina
Total cost: $685 million
Borrower: Companhia Mega owned by YPF (38%), Petrobras (34%) and Dow Chemical(28%)
Description: Natural gas separation and fractionation plant with an annual capacity to produce 562,000 tonnes of ethane, 369,000 tonnes of propane, 242,000 tonnes of butane and 232,000 tonnes of natural gasoline. Argentina's YPF will supply natural gas for the project. Petroquimica Bahia Blanca, a joint venture with YPF, will offtake the project's ethane for use in ethylene production and its derivatives. The remaining products will be purchased by Petrobras for Brazilian domestic consumption.
EPC contractor: JGC
Financing: $485 million in loan-style FRNs and $200 million in Rule 144A fixed rate bonds led by CSFB and Citibank. On completion, sponsors will provide $140 million in equity to bring the debt:equity ratio down to 80:20.
Source: Capital DATA ProjectFinanceWare
AMB-Santiago Airport Expansion
Country: Chile
Total cost: $325 million
Borrower: SCL Terminal Aereo Santiago owned by Agunsa (47%), Dragados-FCC (29.6%), Sabco (13%) and YVR (10%)
Description: Expansion and renovation of the Arturo Merino Benitez de Santiago international airport. The sponsors will build and operate the facilities at the airport over a 15-year term. The expansion is designed to accomodate an expected increase in passenger capacity of 13.5 million per year by 2008 and an increase in air travel through the airport.
EPC contractor: Dragados-FCC
Financing: $213 million Rule 144A bond led by Salomon Smith Barney. Rated AAA by Moody's and S&P. Due July 1 2012, the bond settled on Dec 22 1998 and pays a coupon of 6.95% offering a spread at launch of 237bp over UST. Issue price is 99.944% and redemption is at par. Sold with an insurance guarantee from MBIA.
Source: Capital DATA ProjectFinanceWare
>
?The good news is that, while entire regions were painted with a broad brush last year, investors are now beginning to recognise the good sovereign and project credits within each region?, says John Laxmi, managing director of Citibank's global project finance group in New York. ?The result is that Chile, Argentina and Mexico are differentiated from Brazil, Venezuela and other Latin American countries. Investors are also starting to appreciate that each project should be looked at through the specific factors that affect that project's credit, which means that well structured deals should be able to get to market.?
Mega broke the sovereign ceiling receiving ratings of triple-B minus from Standard & Poors and Duff & Phelps. Such a good rating relates to the fact that sponsors will be providing completion guarantees to the project, as well as guaranteeing the fuel supply and the offtake of the commodities. Foreign currency transfer and convertibility risks are mitigated by offshore accounts that collect US dollar denominated payments for the commodities.
?One of the main strengths of the deal is the importance of the project's production for Argentina's ethylene and Brazil's LPG domestic consumption needs?, says Caren Chang, project analyst at Duff & Phelps in Chicago. ?This essentially makes the project an operating expense for Petrobras and, to a lesser extent, for YPF. So cashflow payments to the project are likely to receive a higher priority during a crisis situation given the opportunity cost of these commodities for the sponsors.?
A year to remember
1998 was a tough year for all sponsors, contractors and financiers involved in the development of projects in Latin America. Economic slowdown in Asia reduced world demand and lowered prices for many of the commodities which Latin America exports. Oil, petrochemicals, copper and gold prices have reached an almost 20-year historical low, which has hurt many projects involved in the development of the region's natural resources.
The reduction in hard currency generated by these projects limited the cashflow available to service related debt. And increased concerns about credit risk and potential devaluations pushed capital markets investors away from Latin America.
Secondary market spreads over the benchmark rate widened dramatically for all emerging markets debt following Russia's default on its rouble debt on August 17. During that week, spreads on JP Morgan's benchmark emerging market bond index widened by almost 500 basis points to stand at 1,560bp over Treasuries.
The spreads on Conproca's $370 million bond, issued to finance the upgrade of Pemex's Cadereyta refinery in Mexico, surged from 450bp at launch to 1,100 basis in October, corresponding to the near shutdown in the capital markets.
Despite the contraction in the banking industry, low commodity prices, sovereign credit downgrades and fickle investor appetite, some projects were able to tap the bond market successfully. Sponsors took advantage of a narrow issuance window opening from March to June. Fertinitro Finance, Monterrey Power, Proyectos de Energia, Phoenix Park Funding and Cerro Negro Finance are examples of bonds which came to market during this period.
Fertinitro was the first emerging market petrochemical project to tap the bond market since the Asian crisis. Sponsors Koch Industries, Pequiven, Snamprogetti and Empresas Polar funded construction of their fertiliser plant in Venezuela through a $560 million loan and a $250 million, 22-year Rule 144A bond led by Citibank. The bond closed oversubscribed and earned an investment-grade rating of Baa3 from Moody's and BBB+ from Duff & Phelps. The project is expected to be one of the lowest cost producers of urea and ammonia worldwide.
But Venezuela's low oil price environment and growing concerns ensuing from the country's political elections contributed to the downgrade of Venezuela's sovereign rating to BB?, and later to B+. These factors heightened the risks for interests in Venezuela's energy sector and meant the downgrade for the debt securities of three projects involved in developing the country's extra-heavy crude oil reserves ? Petrozuata, Cerro Negro and Sincor ? as well as the downgrade for Fertinitro shortly after.
Other Venezuelan deals have stalled. Sincor's $1.5 billion bond issue, due to accompany $1.2 billion in bank financing for the oilfield project, was pulled due to the unpalatable spreads required to make the deal work. Sponsors PDVSA and Total had to invest a hefty $1.9 billion in equity to keep the project on track.
The $200 million Rule 144A bond, mandated to Credit Suisse First Boston, to finance Placer Dome's Las Cristinas gold mine was also cancelled due to low metal prices, poor market conditions and a pressing construction schedule.
What's next?
So what will happen in 1999? John Laxmi says: ?The determining factors for issuing bonds to finance Latin American are the economic outlook and currency outlook for the countries in the region. This covers, for example, the outlook for oil prices1 and the extent to which problems in Brazil could extend to other countries in the region.?
The Brazilian time-bomb exploded in January when President Cardoso decided to float the Real after devaluating it by 8%. Concerns over Brazil's ability to implement the IMF programme to reduce the budget deficit caused a large capital flight from the country and the currency dropped by 41%. Brazilian companies and utilities with large dollar debt have been hit hardest and many have been forced to revert to domestic markets for funds or to roll over debt due this year.
The result is that most Latin American issuance, unless credit-enhanced, are unlikely to find any favour until there are much clearer signs of progress on the Brazilian financial and economic front.
But there is hope. The successful financing of the Santiago international airport in Chile through a $213 million Rule 144A bond has shown that bonds wrapped by an insurance guarantee can get to market. ?The MBIA insurance guarantee wrap made the difference between certain investors looking at the bonds or not,? says Barry Gold, director at Salomon Smith Barney in New York. ?We used this structure because we needed to close by year-end, during a very difficult fourth quarter. It allowed us to attract a much broader investor base as they were essentially looking at a triple-A guaranteed security which happened to have an underlying Latin American credit.?
Resorting to domestic borrowing may be another solution for projects earning revenues in local currency. A joint venture of Tribasa, Grupo Ferrovial and Constructora Delta are ready to issue Chile's first domestic project bond to finance the construction and operation of the Talca to Chillan section of Chile's Ruta 5 tollroad. Banco Santander holds the books for the $150 million peso-denominated bond wrapped by the MBIA-AMBAC insurance guarantee.
Opic takes the lead
There could also be some positive signs from the export credit agencies. Others forms of credit enhancement which may emerge this year include Opic's extension of its political risk cover for project bonds. This product will cover political risks such as violence, expropriation and currency inconvertibility together with the existing partial risk guarantee offered by multilateral development banks. ?By providing political risk cover on bonds, development banks could be bridging a gap by allowing viable emerging market projects to receive a higher debt rating and access the capital markets when financing would otherwise be unavailable?, says Barry Gold.
Projects under consideration by Opic include an offshore oil project in Africa, a small business project in Turkey and a gas-processing project in Venezuela. The Venezuelan project is the $450 million ACCRO III & IV gas-processing complex being developed by Transcanada Pipelines, Enron International and Tecnoconsult. Financing for the project will consist of a loan and an Opic-guaranteed Rule 144A led by Merrill Lynch.
Other deals that have been delayed and are expected to launch in 1999, include: Sincor's $1.5 billion bond, a $600 million Euro/144A bond for the Marlim oilfield in Brazil, $250 million in Eurobonds for the Gasandes pipeline in Chile, Petrodrill's $1 billion bond for an offshore drilling rig in Brazil and a $180 million bond for Entergy's Chinay and Yanango power plants in Peru.
Also in the pipeline are more than $12 billion-worth of new holding companies resulting from the auctions of Brazil's Telebras system and power assets. Only a few of these have bridge facilities in place, while most of them have paid for their acquisitions entirely through equity. Once the dust settles, these companies will eventually come to market to seek permanent financing.
Project Mega
Country: Argentina
Total cost: $685 million
Borrower: Companhia Mega owned by YPF (38%), Petrobras (34%) and Dow Chemical(28%)
Description: Natural gas separation and fractionation plant with an annual capacity to produce 562,000 tonnes of ethane, 369,000 tonnes of propane, 242,000 tonnes of butane and 232,000 tonnes of natural gasoline. Argentina's YPF will supply natural gas for the project. Petroquimica Bahia Blanca, a joint venture with YPF, will offtake the project's ethane for use in ethylene production and its derivatives. The remaining products will be purchased by Petrobras for Brazilian domestic consumption.
EPC contractor: JGC
Financing: $485 million in loan-style FRNs and $200 million in Rule 144A fixed rate bonds led by CSFB and Citibank. On completion, sponsors will provide $140 million in equity to bring the debt:equity ratio down to 80:20.
Source: Capital DATA ProjectFinanceWare
AMB-Santiago Airport Expansion
Country: Chile
Total cost: $325 million
Borrower: SCL Terminal Aereo Santiago owned by Agunsa (47%), Dragados-FCC (29.6%), Sabco (13%) and YVR (10%)
Description: Expansion and renovation of the Arturo Merino Benitez de Santiago international airport. The sponsors will build and operate the facilities at the airport over a 15-year term. The expansion is designed to accomodate an expected increase in passenger capacity of 13.5 million per year by 2008 and an increase in air travel through the airport.
EPC contractor: Dragados-FCC
Financing: $213 million Rule 144A bond led by Salomon Smith Barney. Rated AAA by Moody's and S&P. Due July 1 2012, the bond settled on Dec 22 1998 and pays a coupon of 6.95% offering a spread at launch of 237bp over UST. Issue price is 99.944% and redemption is at par. Sold with an insurance guarantee from MBIA.
Source: Capital DATA ProjectFinanceWare
>
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