The Brazilian airport privatisations may have been a damp squib for commercial banks, but did prove the country’s popularity with operators. It was a fiercely competitive bidding process, proving that investors are still enthusiastic about Brazil, despite a slowdown in GDP growth to just 2.7% last year and the global economic crisis. Infrastructure is one of the areas of the country most prized by foreign investors, believes Luiz Claudio, a partner in the project finance group at Ernst & Young Terco in Rio de Janeiro. In the airport sector, Brazil’s traffic base is growing quickly and has expanded more than 100% per year over the last decade, noted Fitch in a report published in February.

Big price tags

The four privatisations so far have been highly heterogeneous, local bankers say. The first small greenfield airport of São Gonçalo do Amarante, in the northern city of Natal, was a pilot, but three brownfield projects covering Brasilia, São Paulo Guarulhos and Viracopos, located some 100km from São Paulo near the city of Campinas, attracted far more attention.

A consortium of three bidders – Invepar, Airports Company of South Africa and OAS – won the 20-year concession to run the giant Guarulhos airport, bidding R16.2 billion ($8.2 billion). The over-stretched and, as one banker put it, “deeply unloved” airport is Brazil’s busiest and offers the most opportunities for commercial exploitation, as well as upgrades to its amenities, from restaurants and shops through to parking. “There are lots of opportunities to improve efficiency,” says Sergio Monaro, head of project finance and managing director at HSBC in São Paulo. While the physical layout cannot be expanded, airport capacity can be increased through additional terminals and there is scope for it to produce very attractive margins, he reasons.

The winner of the 25-year Brasilia concession was Inframerica Aeropuertos, composed of Engevix Engenharia and Corporación America, which took it with a R4.5 billion bid. Brasilia is emerging as a regional hub for the north and north-east of Brazil, but is unlikely to transform itself into an international hub, says Monaro. That more limited growth profile could make increasing revenues more tricky, he says.

Viracopos is a more challenging, cargo-oriented airport, where bidders are eager to expand terminals to accommodate more passengers, says Monaro. Operators will have room to increase capacity but he questions how they will draw in passengers from the São Paulo metro area 100km away, given severe transit problems. Discussions about linking the airport to the city via a high speed train continue, but finding a developer for that project has been tough, while controversial plans to promote the airport as a rival or possibly replacement for Guarulhos are moving slowly.

Aeroportos Brasil , a consortium of Triunfo Participações e Investimentos, UTC Participações and Egis Avia grabbed the 30-year Viracopos concession with a R3.8 billion bid, raising eyebrows for their lack of experience and generating rumours that they will draft in a foreign entity with more experience.

The right kinds of winners?

The privatisations were highly successful, judged by the parameters that the Brazilian government set, given that it sought to maximise revenues, and attracted a total of eleven bidders for the three airports. Monaro points out that the government raised five times more than the R5 billion total expected, netting R24.5 billion ($14.3 billion) in upfront payments. Bankers have their doubts, though, about the quality of the operators and believe there will be changes to minimum technical qualifications to ensure future concessions are won by highly qualified bidders.

Brazil is the only country where the privatisation was based almost exclusively on price, with very few technical requirements, says Mauro Penteado, partner in the infrastructure practice Machado, Meyer, Sendacz e Opice in São Paulo. “The process has been really aggressive and led to some not-so-experienced, smaller operators being let in,” adds Monaro.

The government itself has expressed uneasiness that leading names in the sector did not win and has even talked about replacing them, says Penteado. Going forward, “the government is likely to impose capital requirements, requiring more skin in the game, and will probably demand operators demonstrate their ability to operate larger airports,” he thinks. A minimum experience requirement of as few as five million passengers per year per consortium is probably too low for airports such as Guarulhos. Still, improvements are likely, as the airports’ performance to date has been dire. The previous operator, state-run Infraero, was entirely dependent on the government for funds and poorly run.

BNDES again to the fore

The other source of banker complaint is this paucity of financing opportunities attached to the process. In line with most other sectors, the national development bank, BNDES, is set to cover most of the financings. It has already agreed to provide the winners with local currency loans, with a 15-year tenor for Brasilia and Guarulhos and a 20-year tenor for Viracopos.

Gianluca Bacchiocchi, partner in corporate finance area at DLA Piper in Chicago, says that Brazil missed an opportunity to use bonds in this deal. “When BNDES stepped up and announced it was going to finance the airports, there was huge disappointment in the banking industry. A lot of banks would have been interested in funding these projects but have been squeezed out,” he notes.

But others are more sanguine. One New York-based lender, however, says that BNDES has proven a useful tool in the downturn: if the US had had an infrastructure bank up and running, it would have been able to finance works more efficiently, he says. HSBC’s Monaro predicts that the volume of capital markets financing will be higher than the 15-20% seen in other projects and could reach a respectable 25-30% of total financing. That would be an improvement: in general, some 90% of long-term financing for Brazilian infrastructure comes from the government, says Machado Meyer’s Penteado.

In addition to a subsidized 6% interest rate, the BNDES charges 0.9% per year plus an operational risk premium which can vary between 0.46% and 3.57% per year. As usual, details on risk-sharing would need to be developed between any private lenders and sponsors: a framework that addresses completion and operating risks will be pivotal to meeting necessary capital investments, says the Fitch report.

Bankers have already moved on and are looking at future deals. Confins in Belo Horizonte and Galeão, the main Rio de Janeiro airport, are likely candidates for the next round of airport concessions, with Manaus, capital of Amazonas state; and Recife, capital of Pernambuco state, also possible candidates. They point out that with falling interest rates, commercial banks may be able to play a bigger role. BNDES might face exposure issues in single assets and certain sectors, says Fuensanta Diaz Cobacho, managing director and head of infrastructure Americas at WestLB in New York.

Brazil’s interbank rate is currently 9%, 300bp more than the BNDES long-term rate, but already down 350bp since a recent high last August. That brings the day when more commercial financing becomes viable tantalisingly close. “For now, BNDES is only game in town. But as rates come down, the advantages of using BNDES may not be as great as they were,” says Scholtz.

Domestic project finance bonds may be a viable option for Brazil’s airports, and local pension funds are taking a look at the sector. Penteado notes that the government has passed a new law providing for tax incentives for financing infrastructure, allowing investors to avoid capital gains tax and withholding tax on interest. The first use of the incentives – the R650 million tax-exempt financing for Ascendi and Bertin’s Concessionaria Rodovias do Tiete toll road concession – closed in May.

Fitch believes future financing sources will include tax-free bond offerings, as allowed by the Civil Aviation Authority. “To the extent that some aeronautic revenues are denominated in US dollars, international capital markets access may be feasible as well,” it noted.

A final issue bedeviling the airport concessions is the continued presence of state-owned Infraero. The weak operator continues to own 49% of the airports. However, Penteado says that while the market was initially very concerned about Infraero as a shareholder and partner, the privatisations have been structured to severely curtail its veto and there are requirements that it participate pari passu in capital calls or face dilution. That reassured bidders, he says. 

Latin airport projects

Outside Brazil, the region falls into two camps: market-friendly Peru, Colombia, Mexico, Panama and Chile are attracting attention and have generally implemented privatisation for their capitals’ airports. Others are more ambivalent. Ecuador is a curiosity as it is implementing a greenfield concession for its capital Quito despite political alignment with Venezuela.

In general, the financial crisis has punctured interest, and there is considerable nervousness from international banks, while local institutions still need further education in analysing airport assets. “There is a constant need to develop the sophistication of the local investor base,” Bacchiocchi believes. That said, airports have fared better than other key sectors as they are considered a safe asset class, thanks to US dollar revenues.

Peru has been the most willing to look at project finance bonds for the sector, says Bacchiocchi. The country has managed the process well, starting with simple projects before attempting more complex ones. “They started with milestone-based projects where the government acts as obligor and where investors did not need to take on construction and operational risk: these were slam-dunk structures,” he says. Once investors were used to the idea of participating, they started working on more complex deals and today investors are more flexible. ProInversion has played a useful role as coordinator across different sectors, he says.

The privatisation of Chinchero, the airport for Cusco, the gateway to Macchu Picchu, attracted 35 bidders last year with a $350 million project that includes designing, building, financing and operating the airport with a 30-year contract. However, there have been delays to the process thanks to government changes.

Other secondary airports in the region could follow. In today’s environment, such secondary airports might be a bit on the small side, but if pooled together, could attract investors, says Diaz Cobacho. Ralph Scholtz, managing director and head of project finance for Latin America at BNP Paribas in New York, agrees. “It’s easy to do a major airport as it is more likely to be profitable but second- and third-tier airports would need a true PPP model or the government to cover some demand risk through availability payments or fund the airport directly,” he says.

Colombia and Mexico have also seen large-scale privatisations, while Chile has an advanced programme, but one in which it is unclear how much will be locally versus internationally financed, says Bacchiocchi.

There is also some interest in Panama, given that its currency is the US dollar. However, the government “does not get how to develop public private partnerships that work properly and involve capital markets,” says Bacchiocchi.

Financing options

Bond financings may not be the whole business securitisations common in the UK, and might give lenders access to only a portion of an airport’s revenues. The Mexico City Airport Trust was a securitisation of commercial concession revenues and leasing fees for gates and counter space, but not airfield side revenues. The Aruba Airport Authority, wholly owned by the government of that Caribbean nation, looks much more like the US airport financing model.

In general, such deals are relatively straightforward from an issuer perspective, adds Bacchiocchi. They tend to be close in structure to corporate bonds and employ structures that do not involve a large number of entities, although they can involve complex cash flow waterfalls and it is important to get the leverage right.

Even so, sponsors will need all the flexibility they can get, at a time when US dollar funding is tough. “The decline in financing from European banks has had a significant effect on airport financing,” says Jean-Marc Aboussouan, head of private sector infrastructure financing at the Inter-American Development Bank in Washington. “The result is lower volumes, higher spreads and shorter tenors,” he says. He believes that less capital intensive transactions involving limited investments might be able to access the local markets with limited tenors.

The IDB is already financing the construction of the new Quito international airport, which is expected to be inaugurated next October, after almost six years under construction. “It required a complex contractual and financial structuring to allow for the upgrade and operation of the existing airport”, says Aboussouan. The IDB has also been involved in financing the modernisation of the Juan Santamaria airport in San Jose, Costa Rica, and approved a loan for the financing of the modernisation of El Dorado airport in Bogota, Colombia.