Terminales Portuarios Euroandinos priced a $110 million senior secured bond issue for its Paita container terminal concession in Peru ion April. The financing is notable for incorporating both construction risk and demand risk but still achieving high levels of leverage. Despite all these factors, and a double-B rating, it sold strongly, and serves as a useful template for sponsors developing brownfield projects in emerging markets.

One of the most interesting features of the concession underlying the bonds – the Peruvian government’s provision of a $22 million per year minimum revenue guarantee – barely affects the bonds’ credit. The minimum revenue guarantee has been a feature of several Chilean toll road concessions, and can be an effective means of mobilising more conservative sources of debt capital. If it is set generously enough, the minimum revenue guarantee might facilitate a low triple-B rating on a Peruvian project.

Fitch rated the bonds BB-, noting that they are exposed to construction risk, and must accommodate phased expansions to the port. The final size of the bond issue is roughly ten times annual ebitda, and the port is highly exposed to cyclical industries such as agriculture and fishing.

Scotiabank, which was also the financial adviser to the project’s sponsors, and Goldman Sachs were the lead managers of the 25-year issue, which priced for an 8.125% coupon. The 144A regulation S bonds were eligible for sale to qualified US investors, and given their rating the sponsors worked hard to sell the bonds offshore. Peruvian institutions have provided the bulk of demand for recent issues, particularly those with domestic currency revenues, but their tolerance for lower-rated paper is limited.

The sponsors of issuer Terminales Portuarios Euroandinos Paita, which has held the concession since 2009, are Andino Investment Holdings, through logistics provider Cosmos Agencia Maritima, and Mota-Engil, each with 50%, though Mota holds its stake through Terminais de Portugal (with 40%), and Mota-Engil Peru (formerly Translei, 10%). Mota-Engil Peru also holds the engineering, procurement and construction contract for all works at the concession bar crane installation, which will be subject to a separate contract with Liebherr.

Another unusual feature of the financing is the use of an additional investment account to fund in advance some of the construction work that will be required later in the concession. Of the concession’s lifetime $293 million in investment, phase 1 will cost $131 million, phase 2, triggered when cargoes hit 180,000 TEU, is $19.3 million, phase 3, at 300,000, will cost $19.8 million, and a fourth phase will cost $123 million. Only the first phase is subject to a fixed-price EPC contract.

The debt, and $53 million in equity, will fund the first phase, transaction costs ($3.7 million), a debt service reserve ($4.4 million), a $2.5 million liquidity reserve account, pre- fund $10.6 million of the first phase, and put $10.9 million aside for additional works. During the lifetime of the debt, some of the concession’s revenues will be diverted towards pre-funding later construction work, in the form of advance payments to EPC contractors. Under certain circumstances, particularly if extreme weather events such as El Nino or La Nina severely depress cargo levels, these accounts can be used to make debt service payments.

The financing features a lock on distributions if the debt service coverage ratio is less than 1.5x, and less than 2x average for the remaining life of the debt. Fitch estimates the DSCR at 1.70x in 2015, the average DSCR between 2012 and 2020 period at 2.32x, and the loan life coverage ratio at 1.92x. In the event that reserves are not sufficient to meet phase 3 construction obligations, the project company might draw on a $5 million working capital facility. Backing Mota’s

EPC obligations are a standby letter of credit from a BBB-rated bank equal to 10% of the phase 1 contract price.

The financing marks a step forward from the structured sovereign payment obligations that have characterised Peruvian greenfield deals to date, because of the presence of demand risk, and also construction risk featuring so prominently. Transport deals, whether the small number of toll road concessions with brownfield characteristics, or airports and ports, should be able to adapt the Paita structure. But sub investment grade appetite will have limits. To lure in the more conservative breed of local investors the minimum revenue guarantee will need beefing up.

Terminales Portuarios Euroandinos Paita
STATUS: Priced 12 April 2012
SIZE: $163 million
DESCRIPTION: Bond financing for expansion of port at Paita, Peru
SPONSORS: Mota-Engil (50%) Andino Investment Holdings (50%)
DEBT: $110 million
MATURITY: 2037
COUPON: 8.125%
BOOKRUNNERS: Scotiabank, Goldman Sachs
PERUVIAN AND NEW YORK TRUSTEE: Citi
ADDITIONAL INVESTMENT TRUSTEE: Scotiabank
INDEPENDENT TRAFFIC CONSULTANT: Apoyo Consultoria
PROJECT LEGAL COUNSEL: DLA Piper (lead); Estudio Rodrigo (local)
UNDERWRITER LEGAL COUNSEL: Clifford Chance (lead); Estudio Hernandez (local)
TRUSTEE LEGAL COUNSEL: SNR Denton (international); Estudio Rubio (local)