Latin port projects have proven popular despite choppy financing markets. They make long-term sense, as the region faces massive logistical bottlenecks, governments have embraced port privatisation and natural resources producers are scrambling to build their own outlets. Ports are rich sources of dollar revenues, which are conducive to multilateral US dollar funding and international commercial bank participation, says Gabriel Goldschmidt, senior manager for Latin America infrastructure at the International Finance Corporation (IFC). The IFC has financed more than 20 seaport projects in the region.

Continued trade between Asia and Latin America has supported increasing investment in the port sector in the region, and proven the economic viability of port projects, and so the sector has done remarkably well to date, says Fuensanta Diaz Cobacho, managing director and head of infrastructure Americas at WestLB. The large financing for Brazil’s Empresa Brasileira de Terminais Portuarios (Embraport) closed in November in spite of turmoil in the markets.

The question is whether this level of port funding can be sustained in 2012, with European banks, the backbone of the industry, facing rating downgrades and crimped access to dollar funding. Deals will be more complex, involving more government agencies and a delicate balancing of a range of players with different strategies and priorities, while sponsors will need to stump up more equity and offer lenders a wider range of guarantees and recourse, unless the improvement in bank markets seen towards the end of January gathers steam.

If that does not happen, lenders are likely to demand more interest and, if things get uglier, sponsors may need to stagger project phases to reduce immediate financing needs. Those deals that are best poised to succeed will have a strong market position, with a good balance between exports and imports, says Goldschmidt.

Full steam ahead

Latin ports are a microcosm of the region’s wider economy, their fortunes linked to resources exports, as well as manufactured imports and healthy consumer demand. In large countries, where distant regions consume what is produced elsewhere, such as Brazil, ports can also be a critical aspect of the domestic logistics chain, says Goldschmidt. Inefficiencies in the sector are particularly damaging thanks to the high costs of demurrage, a cost unique to sea transport, says Dan Bartfeld, a partner in the project finance group at Milbank.

For the most part, recent port developments are either extensions of existing ports or a transfer of assets from government to the private sector. Given the smaller number of players both active in cross-border debt financing and familiar with both the shipping and port sectors, debt financings of greenfield developments are likely to prove limited, at least in the next six months, believes WestLB’s Diaz Cobacho.

Some projects are in part a response to the widening of the Panama Canal to accommodate larger ships, with their need for larger berths and deeper water. Complexities involving these larger ports include finding space for container offloading. At the other end of the scale, single users, typically exporters of natural resources, are increasingly building their own ports. This is particularly the case in Peru, Colombia and Brazil. Despite the development boom, some port types have been neglected. Some of the major grain ports in Brazil continue to suffer from a lack of adequate road connections, which creates delays and inefficiencies during the high season, says Goldschmidt.

This year is likely to see most interest in deals from big countries that enjoy investment grade ratings with smaller, Caribbean and Central American countries facing strong headwinds. “Smaller projects might require more support from multilaterals this year since the commercial bank market will be significantly less liquid,” says John Graham, lead investment officer in the Inter-American Development Bank’s structured and corporate finance division. “Many deals will have to wait until the market gets through this rough patch, which means that sponsors may seek construction period financing and deal with the long-term pieces later in spite of the refinancing risk that this creates,” he adds. “Investors will be more prudent in smaller markets or when analyzing new hubs” agrees Diaz Cobacho.

Bankers point to the financing of the $992 million Moin container terminal concession, won by APM Terminals last August in Costa Rica as a key deal to watch. The company is planning to finance the first $543 million phase of the concession with a combination of non-recourse debt and equity.

Highlights and low pricing

In the larger countries, Colombia has made important strides in terms of transport infrastructure but still lags other large economies, says Goldschmidt. There has been significant development in the regulatory framework, extension of concessions and the clarification of rules of engagement for investment, allowing for increased investment in the port and road sectors. The IFC has helped finance port terminals in Buenaventura on the Pacific and in Cartagena on the Caribbean, he notes. The $231 million TCBuen Port Development Project in Buenaventura will expand capacity to 268,000 TEUs. The IFC and WestLB led the deal, with financial participation from BES Investimentos.

In Brazil, Alan Fernandes, global head of project finance at BES Investimentos, the Brazilian investment arm of Portuguese bank Banco Espírito Santo, points to the rapidly-growing north-east and the established south as providing plenty of opportunities, while Santos, the hub port of the economic powerhouse that is Brazil’s rich south-east, digests two giant new projects.

The $1.04 billion Embraport deal brought in sponsors Odebrecht (58%), DP World (27%) and Grupo Coimex (15%). The Inter- American Development Bank and Brazil’s public bank Caixa Econômica Federal teamed up with private banks Caixa Geral de Depósitos, HSBC, Banco Santander and WestLB to provide $786 million, using a conservative A/B loan structure.

In addition to Embraport, last year saw a $679 million debt package that allowed Brasil Terminal Portuário to add 2.2 million TEUs of container and 1.2 million tonnes of liquid bulk capacity, with the IFC underpinning the deal and committing $97 million. Banco Santander, BNP Paribas, Credit Agricole, DNB, ING and KfW participated in a $582 million syndicated B loan.

Increasingly, ports are jostling with other key infrastructure resources such as airports, toll roads and energy. Brazil is in the midst of privatising three key airports and eight consortiums have confirmed interest, with another 10 said to be planning to come in.

Often investors prefer energy projects where power purchase agreements offer more revenue stability, says Graham. Projects with market risk like highways, ports and airports will be a more difficult sell as liquidity becomes tighter and banks get more selective. Toll roads, where increases are typically linked to inflation, and sanitation, which is attracting increasing attention, have been catching the eye of pension funds in Brazil. “We are not currently focused on ports, though we are evaluating some opportunities in the sector; there are many opportunities elsewhere,” says Fernandes.

Financing uncertainties

To add to the uncertainty of investors analysing other infrastructure opportunities, the deck of players in port deals is getting reshuffled: commercial banks are likely to play a diminished role, take a more prudent stance and charge more for participations. “We are highly focused on the quality of sponsor, the strategic importance of the port to both the sponsor and the country or region and whether the demand for the asset is backed by sound business and economic fundamentals,” says WestLB’s Diaz Cobacho.

Financing groups for projects are likely to be larger and more unruly, depend more on development finance institutions and gradually incorporate newer players, such as Asian ECAs and local commercial banks. These more complex deals will take longer to put together and face a greater risk of falling apart. If European banks remain constrained in the US dollar market, sponsors may face the unpleasant decision of postponing the long-term pieces or, in some cases, breaking their projects into more digestible phases that can get funded in smaller bites, predicts Graham. Sponsors need to be creative and look to emerging sources to get around a dearth of traditional financing options.

The biggest fear circling the market is a worsening in the European banking system. French, Spanish, German and Portuguese banks are the backbone of the port project finance market in the region.

Optimistic bankers point to the success of Embraport, a ground- breaking limited recourse deal that closed successfully in the teeth of tough markets. However, bankers inside the deal noted it was complex and time consuming to put together and involved painstaking reconciliation of the very different policies and procedures of large institutions. Risk allocation for both the construction and market portions was tough to apportion.

“2012 is starting to look like 2009 although for different reasons: the appetite from the commercial market appears to be bleak,” cautions Graham. This year may see the return of multi-agency financings and other official sources of credit to complement the available resources from the commercial market, he suggests. “It’s possible that European commercial bank appetite for emerging market risk diminishes. This may impact the cost of funding and/or cause a flight to quality,” adds Goldschmidt.

Already, European banks are not competitive in dollar financing and many admit that advisory work is becoming more important. “We are facing restrictions and constraints on liquidity and credit ratings,” says Fernandes. “European banks are not competitive in the dollar market for sure.” He is focused on acting as adviser, with some use of bridge loans. A subsidiary in the Cayman Islands is seeking $100 million in debt funding for its Brazil business, and BESI is capable of funding in local currency.

At least BESI and its fellow Portuguese bank Banco Caixa Geral (BCG Brasil) do have Brazilian balance sheets. Diogo Castro e Silva, executive director at the latter, says that will help them weather the storm in Europe. “In 2012, we will continue to be active especially as infrastructure is a major pillar of the bank.” Again the emphasis is on advising and structuring projects. To get European attention, deals will need strong sponsor guarantees and well-funded reserve accounts. Castro e Silva believes that it would be hard to find 30 banks, the number that expressed interest in funding for Embraport back at the beginning of 2010, to pitch for any deal today.

European banks are seeking creative solutions. Fernandes notes that his bank is considering mezzanine structures and bonds with relatively short maturities of five years, after which it is hoped markets will have improved and the debt can be refinanced more attractively. His bank is also working on deals with different amortisation profiles that step-up towards maturity.

Diaz Cobacho argues that European banks are still very much in the game. A dearth of infrastructure pipeline deals in North America means European banks can focus their firepower on Latin America, where infrastructure assets and investments are very much a political priority. Ports, and infrastructure in general, are still benefiting from cheaper pricing compared to other sectors, mostly because of a shortage of transport-related projects and the long-term concession annuity-like profile of these assets, she says. But the fate of WestLB itself, one of the biggest players in the space, is unclear as the part state-owned bank is split into a good and bad bank.

Moreover, even if Europeans do commit funds, sponsors are suspicious of the fate of banks in the old continent. “Some local and regional clients have been choosing to look to a local bank club, as they have reservations on whether certain international institutions will be there for them, or could change their regional or sector focus in the short term” says Diaz Cobacho. “It is not yet clear what role European banks will play in the near future,” says Goldschmidt.

Multilaterals, locals and bonds to the rescue?

Who will step into the breach? This is where things get messy. Logic suggests Asian banks and ECAs should play a bigger role, but they have not been included on many deals to date and infrastructure funds and project finance bonds have also been in short supply.

The safest bet then is that development finance institutions (DFIs) will play anchor roles. DFIs’ preferred creditor status and conservative approach to project structures have been key in enticing commercial banks to date. Moreover, the port sector, with its dollar financing needs, is a natural match to the way they fund, while local currency deals still demand complex measures such as swaps to deal with foreign exchange risk. During times of scarce liquidity, the IDB tries to team up with similar institutions and other agencies to lean-in to support the project finance market, says Graham. Even so, with limited budgets, there is only so much the DFIs can get done.

Local banks are becoming more competitive, says Goldschmidt. Banks throughout the region with access to dollar funding are willing to lend long-term dollars for infrastructure projects. Indeed, “some of these banks may be in a better position than European banks when it comes to lending long-term dollars,” he says.

Diaz Cobacho agrees local financial institutions will play an increasing role providing financing in this sector. However, many still do not have long-term sources of dollar financing and tend to be more conservative in terms of leverage. Most of them also charge higher spreads than international banks.

Asian interest in the sector is growing, but there has been little concrete action. Diaz Cobacho notes that Japanese and other financial institutions wanted in on Embraport, but the number of parties was kept to a minimum because of the size of the dollar financing tranche (which was financed by 5 institutions).

Chinese manufacturers are already starting to supply more goods to projects, such as cranes, and this could bring in greater participation from Chinese state banks and ECAs. But Diaz Cobacho cautions that when in a recent transaction in Colombia WestLB tried to secure Chinese participation in the project, the interest of these institutions focused solely on equipment supply credit rather than project financing; thus, increasing awareness of the asset class and how certain risks are mitigated needs to be done among Asian investors to bring them in to the region, she concludes. The Chinese want big-ticket participation and a big say at the table, while not necessarily being willing to take on commensurate risk, says one banker.

Some bankers are pinning hopes on capital markets financings but progress is proving painfully slow, despite encouraging moves in legislatures to make the sector more attractive. Brazil is trying to improve illiquid and opaque secondary bond markets, for example. Drafting of laws covering project finance bonds are in the last stages, with details on exemptions from certain taxes for foreign investors being thrashed out, says Castro e Silva.

Still, institutional investors are reluctant to enter the infrastructure sector because of their lack of familiarity with risk allocation. “We are in this looking on game, where each party expects the other to take on risk. My sense is that local institutions will continue to play a small role and will not be able to compensate for the disappearance of key players, if that happens,” says Goldschmidt.

Bartfeld, who worked on the Embraport deal, notes that although there was resistance from sponsors on the subject of recourse, Embraport shows complex deals can get done and as the model now exists, has been vetted and discussed, the next projects will not be so difficult.

Sponsors may struggle

If the crisis ends up creating a shortage of financing options, sponsors may need to decide between delaying a project or significantly increasing its equity component, says Goldschmidt.

When possible, firms will seek to phase their investments in order to break the investments into manageable pieces. However, in some cases, phasing is expensive or impractical as the fixed costs get front-loaded into the initial stages, making the deal economics very complicated, says Graham. This year, practicality will be the name of the game for those wanting to get projects up-and- running. Construction financing with long-term take-outs could appear, with the sponsors preferring to spend 2012 getting something, anything, stitched together and worrying about optimising the long-term financing at a later date. Moreover, competition for lender attention will soon come from looming refinancings of deals from the 2004-6 period.

Sponsors will have to stump up more equity. Whereas an 80-20 ratio was possible five years ago, today debt will be limited to about 70% and deals will include a lot more enhancements than in the past, such as completion guarantees and greater access to collateral. Graham sees more partnering between operators, construction companies and other players that rely on these transactions for contracts. These firms may be able to justify the tighter credit conditions and pricing.

Finally, the dearth of financing may tilt the balance of power in favour of lenders so that smaller tickets than usual will get lenders a seat at the table, says Graham. Two years ago a lender would need to commit $50 million to $100 million to be a big player, but now a much smaller ticket will do.