Mexico’s states have taken the lead in developing new PPP structures for social infrastructure assets. The federal government’s roads programme has attracted the most attention, and the federal government and ICA brought a novel two-prison bond financing to market in 2011.

But Mexico City was the source of two PPP concessions with structural innovations in 2012, of which one – the Grupo Indi-led CEVASEP I & II prisons – is our Latin American Social Infrastructure Deal of the Year. Both the CEVASEP deals and the runner-up – the Linea 12 metro financing – relied upon Mexico City’s master trust for credit enhancement. The prisons deal, however, also included an element of government ownership in the project company.

The Ps2.229 billion financing ($175 million) featured just about enough risk transfer to make using a proyecto de prestación de servicios (PPS) structure worthwhile, but little enough to get mid-tier domestic lenders comfortable with the risk profile. It may give other states the confidence to bring smaller social infrastructure assets to market.

The project involves building two 750-inmate facilities for Mexico City’s overcrowded prison system. The grantor is the Secretaría de Seguridad Pública del Distrito Federal, the public security ministry for the Distrito Federal, the Mexican state covering Mexico city.

Because of security concerns the grantor was able to dispense with a formal bidding process, issuing a request for proposals in September 2010 to consortiums led by Grupo Indi and Grupo Hermes. The bids were based on detailed design, and primarily asked the sponsors to bid a particular monthly availability payment.

Grupo Indi and fellow sponsor Idinsa won the concession in December 2010, and then spent the next six months structuring the financing, before the congress of the state spent another eight months considering whether to approve the 14-year PPS contract. The approval was the subject of ideological wrangling, but now appears to have broad-based legislative support.

The sponsors were able to stick to their bid during this protracted process by lining up out-of-the-money base rate hedges on Mexico’s TIIE lending benchmark, and building in a contingency on the credit spread. In April 2012 the sponsors and their adviser, Astris Finance, went out to the bank market looking for a long-term package.

The total debt requirement for the projects was a little over Ps2 billion, small enough that the sponsors could work with mid-tier lenders. The larger Mexican banks, many of them with overseas parents, struggle to go much beyond mini-perm tenors, while a bond financing would be more appropriate to a 20-year contract.

BBVA’s Bancomer came close to matching Interacciones on a 12-year financing, but Interraciones came through on pricing. Joining it as lead arranger was Banco Multiva. The only drawback to working with these lenders was that their hedging product offering was not quite up to the demands of a long-term project financing. Instead Monex provided the deal’s 12-year interest rate swaps, ranking pari passu with the two lead lenders.

The financing consists of a Ps1.720 billion non-recourse senior loan, a Ps285 million VAT facility and Ps224 million in non-recourse subordinated debt, with Interacciones providing all of the subdebt. The senior debt is priced initially at around 270bp over TIIE, before rising to over 300bp later on in the life of the loan.

Complementing the subdebt is Ps441 million in sponsor equity from Indi, Idinsa and an unnamed silent financial equity provider. The state also receives an equity stake in the project in exchange for providing the land on which the facilities will be built, a precedent that other grantors may try to emulate, even if their landholdings are not as valuable.

Operational risk is minimal, because the activities of the private operators are confined to the exterior of the two prisons. Mitigating construction risk is the use of partial payment obligation certificates, under which the state promises a defined termination payment in the event of contractor default upon the projects’ reaching specified construction milestones.

The project mitigates payment risk through the use of a trust funded with excess cashflow from the Distrito Federal’s master trust. The master trust services the state’s general debt obligations, and is funded in large part with transfers from the federal government. Excess cashflows from the master trust are deposited in the second trust, and can be allocated to service PPS and other obligations.

Projects are allocated a certain proportion of cashflows sufficient to service their payment obligations, and usually feature an excess collateralisation. The two CEVASEPs’ collateralisation is around 120%. These constraints mean that there is a limit to the number of projects that the state can procure in this fashion – probably about four or five, but those projects will be easily financeable. Healthcare and cultural projects in the Distrito Federal, as well as any other states in a position to fund a projects trust with excess federal transfer revenue, will be looking to copy the structure. 

CEVASEP I & II
Status
Closed December 2012
Size
Ps2.67 billion
Description
PPS financing for two prisons in Mexico’s Distrito Federal
Grantor
Secretaría de Seguridad Pública del Distrito Federal
SpoNSors
Grupo Indi, Idinsa
Equity
Ps441 million
Debt
a Ps1.720 billion senior loan, a Ps285 million VAT facility and Ps224 subordinated debt
Lead arrangers
Banco Interraciones, Banco Multiva
Hedge provider
Monex
Sponsor financial adviser
Astris Finance
Sponsor legal counsel
Woodhouse Lorente Ludlow
Lender legal counsel
In-house
Market and technical consultant
PRECOOR
Independent and owners’ engineer
VERIFITEC