Banks have spent much of 2012 ceding project finance business to the capital markets. The Mexican power market, however, has proved somewhat immune to bonds’ charms. Abengoa and GE pulled a bond refinancing for their Nuevo Pemex cogeneration project, while Acciona priced a bond financing for its two wind projects in Oaxaca at all-in yields of 7.25%.

Banks view thermal power projects as core territory, despite signs that some sponsors chafe at the restrictions of project finance loans. InterGen, for instance, closed on $335 million in debt for a power project and compression station, with a 10-year tenor, an 18-year amortisation profile, 275bp over Libor pricing, and BTMU, EDC, HSBC, Nord/LB, Scotiabank and SMBC as lenders.

But banks’ current inability to provide long-term debt is starting to tell. Grupo Mexico, a mining conglomerate, closed a $575 million 20-year bond issue that priced at 388bp over the equivalent treasury for a 5.5% coupon. The sponsor shrugged off a two-year construction period, and its associated carry, to close a well-received bond that attracted US 144A investors as well as Mexican afores, its pension funds.

The lead underwriters on the bonds were Morgan Stanley (structuring agent), Bank of America Merrill Lynch, and HSBC. Moody’s rated the bonds Baa2, while Standard & Poor’s rated them BBB. Although afores typically prefer to have more involvement in the structuring of bonds, they went through a roadshow at the same time as buyers in Houston, Los Angeles and London.

The financing was one of the first chances that the afores have had to gain exposure to the country’s power sector, outside of issues by the Mexican state power company, the Comisión Federal de Electricidad. The CFE issued Ps13.5 billion ($1.05 billion) in bonds in September, and the CFE’s monopoly position in supplying power to Mexico (outside of Mexico City) was part of the reason for its success in accessing markets.

The CFE is able to offer subsidised power rates to residential users by charging high prices to industrial users. Reform to the CFE’s tariff structure has been on the agenda for several years but has gained little traction. Large users’ best hope of procuring lower power prices is to develop their own power projects, under the country’s self-supply framework.

Self-supply contracts have been common ways of getting assets financed that would otherwise struggle to win a CFE offtake contract. Small hydroelectric plants, early wind financings, and petcoke-fired units have all closed bank financings on the back of self-supply projects, though in many cases the self-supplying offtakers would only hold small nominal equity stakes.

Grupo Mexico’s deal is unusual, in that an affiliate of the offtaker owns all of the projects and that it finances straightforward combined cycle gas turbine technology. Grupo Mexico owns project company México Generadora de Energía, and controls Southern Copper Corporation, which in turn owns Minera Mexico, which in turn owns Mexicana de Cobre and Buenavista del Cobre, the offtakers for the issuer’s two 250MW power plants.

The offtake agreements are very bond investor-friendly. The contracts benefit from corporate guarantees from Minera Mexico, consist of capacity payments with no fuel price risk, and must be honoured even during force majeure events.

Whatever Grupo Mexico’s feelings about the amount of operational risk it was required to retain, the contracts allowed the lenders to market the deal as a derivation of Grupo Mexico risk, and Grupo Mexico is a familiar name in the Mexican capital markets. The parent has a minimal amount of debt outstanding, but Southern Copper has bond debt outstanding, and is one of the largest traded copper producers in the world.

Grupo Mexico is the third-largest user of power in Mexico, and the largest private user. Power accounts for 30% of its costs, and it hopes to see savings of 25% over buying power from the CFE. Gas Natural is operating the plant under a 16-contract, but the sponsor is procuring its own gas from the US, with El Paso transporting the fuel.

Construction risk is minimal. Siemens is building the plant, which uses a modern version of its F technology, under a fixed-price engineering, procurement and construction contract with full liquidated damages provisions. The plants have a construction price of $577 million, and the first is 89% complete, while the second phase is 55% complete.

The bonds should be popular with traders using an arbitrage strategy that includes debt obligations of other Grupo Mexico affiliates. As one source close to the deal noted, recent Latin American project bonds such as those issued by drill-ships under charter to Petrobras, have tended to tighten over time relative to those issued by the offtaker.

Grupo Mexico has advantages of name recognition and access to its own gas supply. Other self-supply issuers will need a solid credit, if not their own gas, if they are to replicate Grupo Mexico’s feat. But bond investors may be willing to accept greater levels of construction risk, and banks’ grip on the sector will relax a little bit more. 

México Generadora
de Energía
STATUS
Closed November 2012
SIZE
$732 million
DESCRIPTION
Financing for two 250MW greenfield gas-fired plants SPONSOR
Grupo Mexico
DEBT
$575 million
MATURITY
2032
COUPON
5.5%
UNDERWRITERS
Morgan Stanley (structuring agent) Bank of America Merrill Lynch, and HSBC
ISSUER LEGAL COUNSEL
Allen & Overy (international), Ritch Mueller (Mexico)
UNDERWRITER LEGAL COUNSEL
Skadden (international), Creel, García-Cuéllar, Aiza y Enríquez (local) INDEPENDENT ENGINEER
SAIC
TURBINE SUPPLIER AND EPC CONTRACTOR Siemens
OPERATOR
Gas Natural