Mexico's federal and state governments have had to turn inwards to find the resources to advance their PPP programmes. Highly-leveraged acquisitions funded by European lenders and US infrastructure funds are out. Conservative leverage, locally-sourced debt and strategic sponsors are in.

The deal that grabbed the headlines in 2009 – the development certificate issue by ICA and Goldman Sachs to refinance their Farac I acquisition debt – sparked domestic institutional interest in infrastructure equity. But the deal that demonstrated that a strategic sponsor and a mixture of domestic and relationship lenders could still support a large toll road financing was OHL's Ps18 billion ($1.4 billion) Concesionaria Mexiquense deal.

The 30-year Conmex concession involves building a 155km road to the east of Mexico City, the Sistema Carretero del Oriente or Circuito Exterior Mexiquense. This bypass connects to three main roads leaving the city, bound for Queretaro, Pachuca and Puebla. The state of Mexico awarded the concession to OHL in 2005, and the work was split into four phases. Phase one is already complete, and second and third phases are underway.

The sponsor closed a first financing for the road in 2004, a 20-year Ps2.31 billion loan led by BBVA, Banobras and ICO, which provided Ps 770 million each. The project was heavy going, because the sponsor had to acquire the rights of way for the road itself, and local landowners proved to be extremely recalcitrant. OHL had to contribute increased equity to meet acquisition costs.

The first 52km phase, between Jorobas and Penon, proved to be popular with drivers shortly after it opened in October 2005, and in 2006 closed a restatement of the 2004 debt, increasing it by Ps1.017 billion, with the three banks again taking equal shares. Traffic on the road was good enough to justify this additional leverage and reimburse OHL for the some of the cost of the land acquisitions.

The concession agreement with the state made the building of the second and third phases contingent on the first phase reaching certain traffic milestones. OHL decided to proceed with the next two phases before these were met. The Conmex concession, between 2007 and 2007, experienced a 17% growth n traffic and a 3.8% growth in toll revenues. Cofides, a Spanish development finance institution, owns a 13% stake in phase one, while OHL owns the rest, as well as 100% of phases 2 and 3.

OHL went back to its banks in May 2008, looking for enough debt to complete phases 2 and 3. The developer hoped to exploit the increased willingness of European banks, even those without Mexican retail operations, to participate in Mexican toll roads. Their interest proved short-lived, after several of them were left with uncomfortably high hold levels on the Farac 1 deal.

The three original lenders brought in Banorte as lender in November 2008, and increased the debt's total to Ps6 billion. The financing offered some incremental leverage, but did not finance sections 2 and 3. OHL hoped for a much larger commitment to fully-fund 2 and 3 as markets recovered in 2009.
But the bad news kept coming. Mexico's gross domestic product began to contract, by 8% in the first half of 2009, its currency depreciated, by 40% against the dollar, and measures of domestic consumer confidence also declined. Unemployment hit 5.3%. Not only was attracting a lender that funded itself in dollars unlikely, but even Peso-funded lenders began to take a look at the road's traffic predictions.

The banks returned again and again to their traffic studies to find numbers that were conservative enough to attract a broader lender group. The sponsors also had to convince lenders that the risks of the second phase, which went through a combination of a geologically tricky former lake bed, as well as urban areas with expensive rights of way, were surmountable.

But on 23 June OHL succeeded in signing banks into a Ps12.5 billion refinancing of the 2008 deal. But the key to getting a larger commitment from Banorte, and enticing in Santander, was reducing the debt's tenor from 20 years to 15 years. Santander and Banorte extended ICA over Ps1 billion of 15-year debt for its La Piedad bypass concession in the first quarter of 2009, and while they were unable to bring in any outside lenders on that loan, the deal set a ceiling for acceptable tenors in the market.

La Piedad also shared a starting pricing level with the 2009 Conmex financing, at 275bp over the TIIE rate, with Conmex' pricing rising to 400bp over its 15-year life. BBVA contributed Ps2.5 billion, Banorte Ps2 billion, ICO Ps1.876 billion, Santander Ps1.625 billion, and Banobras Ps4 billion.
Having existing traffic, existing cashflow, and conservative leverage, helped the deal get done despite the indignities suffered by the Farac follow-ups and the toll of the Peso's devaluation. The 15-year debt was oversubscribed, though it leaned on OHL's, and the road programme's, core lenders. In fact, it garnered commitments from every lender active in providing long-term Peso debt to Mexican toll roads in 2009.

It was, however, the largest deal to close in Mexico's road sector since 2007. The federal government's ambitions for future road deals will rely heavily on such a group of lenders. When Banobras committed to the 2004 deal it treated private toll concessions as a sideline. It is now the lynchpin of the country's toll roads sector.

Concesionaria Mexiquense
Status: Closed 23 June 2009
Size: Ps 18 billion ($1.4 billion)
Location: Mexico City
Description: Refinancing and expansion financing of 30-year concession for 155km bypass
Grantor: State of Mexico
Sponsor: OHL
Equity: Ps5.5 billion
Debt: Ps 12.5 billion
Tenor: 15 years
Lead arranger and financial adviser: BBVA
Participants: Banorte, Santander, ICO and Banobras
Sponsor legal counsel: In-house
Lender legal: Mijares, Angoitia, Cortes y Fuentes
Traffic: Cal y Mayor y Asociados
Technical: Grupo Promotor Aries
Insurance: SESPEC