2010/SOM2/SOM-SFOM/WKSP/007 Session 2-2 Regional Infrastructure Financing Trends in LAC Submitted by: Inter-American Development Bank Workshop on the APEC Growth Strategy Sapporo, Japan 1 June 2010
Regional Infrastructure Financing Trends in LAC 2010 SOM-SFOM Workshop on the APEX Growth Strategy Sapporo, Japan John Graham Senior Investment Officer Structured & Corporate Finance Inter-American Development Bank The Inter-American Development Bank Inter-American Development Bank (IDB): AAA/Aaa Rated Largest single source of financing for Latin America 48 Member Economies (26 Borrowing Members) 2009 Loan Approvals at US$15.2 billion Outstanding balance of US$55-60 billion Structured & Corporate Finance Department (SCF): Created in 1995 to support private sector investment in the region Mandated to provide tailored financial solutions to those investing in LAC Long-term relationships with all major regional commercial institutions Track record of cooperation with multilaterals and other agency lenders
IDB/SCF: Portfolio & Execution Market Coverage: Infrastructure Financial Markets/Trade Finance Corporate Finance Track Record: Operations in 20 economies & regional funds Over 120 regional projects funded US$35.4 billion in investment cost mobilized US$7.0 billion in direct IDB financing/guarantees US$4.9 billion in syndicated B Loan participations 100+ participant and co-financing relationships Operations in development region-wide Deal of the Year accolades from major industry journals IDB/SCF: League Table Leading participant institutions (by allocation): 1. Banco Santander Central Hispano 2. BBVA 3. Sumitomo Mitsui Banking Corp. 4. Société Générale 5. Natixis Banques Populaires 6. KFW IPEX 7. Dexia/Credit Local de France 8. WestLB 9. Banco Itau Europa 10. Calyon 11. DEPFA 12. Citigroup 13. BNP Paribas 14. Rabobank 15. ING 16. Cordiant 17. Mizuho 18. ABN AMRO 19. Bank of Tokyo - MUFG 20. Espirito Santo Investment
Latin America and the Caribbean: 2010 Where we are today LAC must do more to bridge the infrastructure gap with its emerging markets peers (Asia, for example) Investment needs to reach 3-6% to begin the journey back to competitiveness. LAC is currently investing 1-3%. Energy will continue to be the most critical sector and will receive the largest amounts of attention from debt and equity Renewables investment will grow rapidly, but will remain a small portion of overall portfolio compared to traditional sources Ports, logistics and airports are in crisis, but also very complicated for private sector investment. Growth will continue. Highway development is still largely with the public sector although there have been some high-profile concession programs on key highway links Water and sanitation projects are also largely in the hands of public sector entities. Sensitive sector for international investors New sectors entering the infrastructure discussion LAC: Regional Trends for Infra Financing Trend #1: The global financial crisis will sharpen the difference between the haves and have nots Markets are recovering in economies with stable legal and regulatory environments Funding is expensive and structures are conservative, but markets are returning to normal in Investment Grade environments International investors (equity) are returning to these environments to take advantage of selective opportunities Commercial banks are following their core clients back to the market in these economies For many other economies, cross-border financing has disappeared and the outlook for a return is less-than-optimistic Governments and investors are turning to local/regional sources of debt and equity to bridge the gap Presence of these new players is challenging for banks
LAC: Regional Trends for Infra Financing Trend #2: Governments will have to do more Scarce debt and equity looking globally for conservative and stable financial environments Firms seeking to invest in economies with stable legal and regulatory environments as well as large programs that include many investments in order to justify the fixed costs First generation infrastructure projects (the filet mignons ) already privatized Second-Third-Fourth generation programs are more complicated assets with a higher need for risk mitigation, subsidies, etc. Governments offering risk mitigants (even debt guarantees) to ensure liquidity for high-profile projects High degree of experimentation with PPP programs in order to further entice debt and equity investment So far, results have been slow LAC: Regional Trends for Infra Financing Trend #3: PPPs have yet to prove themselves Based on the UK PFI model, many regional governments have assembled Public-Private-Partnership programs Traditional infrastructure as well as non-traditional sectors such as education, correctional facilities, universities Led by Chile, some highly visible success stories Overall, the model has disappointed so far (no silver bullet ) Fundamentals that were necessary for successful concession programs are now even more critical for PPP programs PPP concession programs require highly-skilled regulators that can act quickly and decisively with their private sector counterparts Deals funded by commercial banks are very difficult to manage given the inherent flexibility embedded in these contracts LAC has become a laboratory for different models
LAC: Regional Trends for Infra Financing Trend #4: Institutional funding will grow in influence Investors were quick to adapt project finance structures to the institutional market during the 2008-2009 crisis 2009 witnessed a large expansion in institutional PF deals as well as corporate finance Concurrently, regional governments are loosening regulatory restrictions to allow investment in infrastructure and even overseas ventures Proliferation of infrastructure funds which are taking debt and equity positions in regional infrastructure projects Investment grade economies seeing a return of offshore as well as onshore investment to accompany the return of commercial bank financing Sub-investment grade economies are using institutional financing as a natural substitute for international commercial banks Overall trend is for national savings to be channeled into the economy through infrastructure investments Case: São Paulo Metro Line 4 (PPP) São Paulo Metro Line 4 -Yellow (time permitting)
Case: São Paulo Metro Line 4 30-year PPP with the State of São Paulo for the operation and maintenance of a 12.8km greenfield metro line Project Structure: State of São Paulo responsible for civil works (tunnels, stations) Concessionaire responsible for procurement, systems and operation State obligations backed by a Guarantee Fund established for PPPs State assumes infrastructure risk including penalties for delay Procurement, operation and financial risks assumed by the private sector Revenue and forex risks shared between the State and the Concessionaire Financing Process: IDB agrees to two-phase loan of US$130mm B Loan participation set at US$240mm (eight banks) Lehman Brothers/Global turbulence occurs two weeks before expected closing Uncertainty with regards to LIBOR funding (TED spread over 300bps) One loan participant unable to execute Un-tested market disruption clauses becomes a major issue Closing achieved in October 2008 Tombstone: US$368.7mm IDB A/B Loan (Phase 1) Signed: October 7, 2008 Borrower: ViaQuatro S.A. (SPV) Sponsors: CCR (Brazil), Mitsui (Japan), Banif Group (Portugal) Project Financing: Phase I A Loan: US$69.2 mm Phase I B Loan: US$240.0 mm ----------------------- Phase II A Loan: US$59.5 mm Phase II B Loan: TBD Lender of Record: Inter-American Development Bank Lead Arrangers: Santander, BBVA, SMBC, KfW, BES Co-Lead Arrangers: WestLB, Société Générale LATAM Deal of the Year: Project Finance, PFI, LatinFinance