ACS has closed the S./942 million ($340 million) local currency bond financing for its Taboada water treatment concession in Peru. The financing, led by BNP Pari­bas, is one of the largest recent non-sovereign Peruvian Nuevo Soles issues, and builds upon the debut of the RPICAO financing instrument, the Huascacocha financing from 2010.

The bonds are registered under Reg S and Rule 144A, and thus eligible for sale to qualified US investors, and received a BBB global rating from Fitch, on top of their AAA local rating. The financing indi­cates that there is some appetite for Peruvian local currency debt from international in­vestors, attracted to the Peruvian economy’s commodities-supported resilience.

Interest from international debt buyers will be useful, because there is likely to be a limit to the amount of debt that Peru’s pension funds and life insurance companies can digest at a single sitting. A deal of Taboada’s size is probably close to that limit, though international participation in this deal was useful rather than vital. The largest single ticket came from the Peru­vian pension funds’ infrastructure trust, which was, as in Huascacocha, a cornerstone account.

There are some important differences with the previous deal, largely in terms of how the structure copes with negative carry, or the need to pay interest on debt proceeds far in advance of these being put to work. The Peruvian concessions structure is designed to isolate lenders from construction and performance risk, by issu­ing project companies irrevocable pay­ment obligations that are only created when a project reaches pre-defined construction milestones.

The issuer, Cayman Islands-registered Taboada Finance Ltd, will use the proceeds of the bonds to buy these obligations, known as retribución por inversión certificados de avance de obras (RPICAOs), from Delaware-registered Taboada RPICAO Purchase LLC, which in turn buys them from the concession company, Planta de Tratamiento de Aguas Residuales Taboada SA. Until they are issued, the bond proceeds stay on deposit, earning less than their coupon payments.

In the event of a concession termination before all the RPICAOs are issued, and therefore all the proceeds are spent, the issuer would need to pay bondholders a make-whole premium to cover some of the foregone interest on the unspent balance. ACS has dealt with the make-whole issue in a straightforward fashion, offering a corporate guarantee from its Cobra subsidi­ary, backed by a standby letter of credit.

ACS also has a much less severe problem with negative carry than the Huascacocha sponsor, Brazil’s OAS, because the project has a less disjointed construction process. ACS will build the wastewater plant on an 18.8-hectare site next to Playa Taboada in Callao province. It will have an initial capacity of 7m3 per second, rising to 10.5m3 per second, and finally 14m3. Unlike its precursor, which was building a water derivation project in the Andes, and would have to stop construction during Peru’s rainy season, work on Taboada can continue with less interruption, allowing the issuer to purchase RPICAO obligations at a much smoother rate.

However, adjustments to inflation during the Taboada construction period mean that the final amount of RPICAOs available to the project, and therefore the total debt amount, will not be known until after completion. So, like Huascacocha, the bond issue includes a delayed draw tranche, with the draw taking place if inflation, rather than when the weather, permits. Roughly a quarter of the Taboada issue, to Huascacocha’s rough third, is delayed-draw.

The Taboada debt breaks down into a S./572.089 million series 2011-1, which matures in 2029, a S./220 million series 2011-2, due 2033, and the delayed-draw series 2011-3 of S./150 million, also due 2033. The bonds have a coupon of 5.965%, adjusted for Peru’s valor adquisición constante, an indexation for financial instruments derived from Peru’s indice de precios al consumidor, or consumer price index.

The index used to adjust the RPICAO amounts is the wholesale price index, or indice de precios al por mayor, and the deal includes a S./34 million reserve that is designed to cope with any mismatch bet­ween the two indices. The financing also includes a four-month debt service reserve, on top of protections that Sedapal, the grantor and offtaker, offers to investors.

Sedapal, the water utility for Lima and Callao, gives bondholders access to the master trust account that is used to re­ceive payments from customers that pay direct from their bank accounts. The spon­sor of Huascacocha had to persuade Peru’s ministry of finance, which had assumed Sedapal’s debt, to give bondholders security over a portion of the proceeds in this ac­count. ACS and BNP, in turn, had to make sure that Taboada bondholders, would have a pari passu allocation of the proceeds from Sedapal’s global collection account.

Sedapal has the obligation to top up this account if needed, and its obligations benefit from a contingent guarantee from Peru’s ministry of housing, which would make a budget allocation to meet RPICAO payments if the projected amounts in the account are not enough to meet them. Sedapal, however, will also maintain a nine-month payment reserve.

Sedapal also has the right to grant additional projects, beyond Huascacocha, Taboada, and a third, La Chira, which has yet to close financing, allocations from the account. It must, however, maintain an aggregate debt service coverage ratio of 1.1x. As Fitch notes, the DSCR post-Taboada would stand at 2.3x, giving the offtaker some breathing room.

But Sedapal’s ability to fund additional projects in this lender-friendly fashion has a limit. Sponsors and investors looking for additional Peruvian opportunities will need to look to different grantors. Sponsors, in turn, will need to cultivate offshore sources of debt for their larger concessions. The next big test of both propositions will be OAS’s Linea Amarilla, for which the municipality of Lima is the grantor, and for which a financing is set to close later in 2011. 

Taboada Finance Ltd
Status: Closed 10 March 2010
Size: S./942 million ($340 million)
Location: Callao, Peru
Description: Securitisation of remuneration obligations for 14m3 per day wastewater treatment plant
Grantor: Sedapal
Sponsor: ACS
Sole initial purchaser: BNP Paribas
Debt: S./572.089 million series 2011-1, due 2029, S./220 million series 2011-2, due 2033, and delayed-draw series 2011-3 of S./150 million, due 2033
Legal counsel to initial purchaser: Rubio Leguia Normand (Peru), DLA Piper (US) and Maples and Calder (Cayman Islands)
Legal counsel to sponsor: Avila (Peru), Chadbourne & Parke (US)
Indenture trustee: Bank of New York Mellon
Peruvian trustee: Citibank