Morea welcomes highway PPPs as Argentina seeks capital markets boost
August 6, 2018 |
Fresh after signing six highway contracts, under-secretary says infrastructure securities offer a higher return, yet similar levels of sovereign risk
Argentina’s capital markets are poised for a boost in 2019 when six road projects awarded to consortia last month under the governments public private partnership (PPP) program seek financing, the country’s undersecretary for PPPs said.
Funding for the highway projects, awarded last month to five different consortia, will comprise the main supply of Argentine sovereign risk in 2019, since the government is not expected to return to the markets under its $50bn loan agreement with the IMF, José Luis Morea, told LatinFinance.
The six projects, which will require some $6bn in investment over the next four years, will seek financing from a number of sources, including commercial banks, multilateral lenders and institutional investors, whose appetite for Argentine risk Morea said was undiminished despite the market and peso volatility of recent months.
The consortiums are also expected to negotiate working capital lines and structure guarantees with financial institutions including the IDB and BICE, Morea said.
"Consortiums need to secure working capital and bridge loans," he said on Friday. "The next year is about putting the financing together."
And in doing so, Morea is confident a large chunk can be obtained from the capital markets. He said potential project bonds would carry sovereign risk, but expects such securities to pay a premium over where government paper trades.
"These are brownfield projects, so the yield will be higher than the sovereign, yet the risk is the same, so I believe there will be more appetite [from investors], Morea added.
Argentine risk, however, has increased on the back of an earlier sell-off in global equities and the ballooning of the Argentine peso.
The country's 10-year bonds were quoted at roughly 8.5% in the first week of August after coming to market at 5.875%.
"[Argentina's] 30-year is now at 9%, trading in the high-70s," a DCM banker in New York said on Friday. "It is the worst-performing bond in the region so it will take some time for investors to warm to these bonds."
A New York-based investor described project bonds from Argentina, in the immediate-term, as "wishful thinking" because of where inflation is being projected at in the coming years.
"You need a significant normalization of economic policy," the investor said. "It is going to take a while but at least Argentina is committed, and with the IMF on board, they have to deliver on the fiscal side."
Morea, however, is bullish on securing capital markets participation - through these sponsors - to help fund the transportation initiatives.
"In May, we went to London - in the middle of the FX crisis - and perceived a high appetite [from investors]," he said. "Our intention was to broaden the table and bring in new institutional investors."
Some of the prospective new investors could come from London, Canada, Australia and family offices in Latin America. Morea also said there was potential for commitments from institutional investors in Japan, South Korea and China.
Given the restrictions of adhering to an IMF program, Argentina is no longer expected to tap the marketplace for its funding needs, leaving few options for investors looking to take on the country's risk.
"This would be the only new sovereign-related paper in the market," Morea added. "But with a higher return at the same risk [as the sovereign's bonds]."
More immediately, however, sponsors will likely rely on commercial banks to take the risk on Argentine project finance.
"There needs to be willingness from banks to step in and take the tenor," a second DCM banker said. "It is a fantastic idea, but the market is not there today."
The second source also said the government needed to find a way to help mitigate the construction risk, and stressed the need for contracts to be denominated in dollars.
He also mooted the possibility of mini-perm loans, allowing for time to pass until more permanent forms of capital can be implemented.
"There is mezzanine debt or equity maybe, but permanent capital is going to have to wait because I cannot imagine anyone betting on 15-year Argentine risk," the DCM banker said. "Mini-perms are useful because it does not hold up the process and gets everyone over the construction hump."
Colombia's 4G infrastructure program has implemented similar structures in the last two years. With help from its development bank FDN, the Andean country has achieved financial close on a number of toll road projects, marrying different sources of capital such as commercial banks, project bonds and infrastructure funds.
After signing the six contracts, works are set to start in October, according to a statement from the transportation ministry.
Road Corridor B entails 546km of construction across national route five between Luján in Buenos Aires province and Santa Rosa in La Pampa. The contract was awarded to the China Construction America-Green consortium for $1.2bn.
Road Corridor E features 390km of works through routes nine, 34, 193, A008, A012 and 1V11 in Buenos Aires and Santa Fe provinces. The contract was awarded to Helport-Panedile SaicFel-Obras y Servicios Copasa-Eleprint for $1bn.
Road Corridor F involves 635km along national routes 33 and nine in Córdoba and Santa Fe provinces. The same consortium that won Road Corridor E snapped up this mandate for $722m.
South Road Corridor, meanwhile, went to the Rovella Carranza-JRC-Mota Engil Latin America team for $699m. Works will cover 297km of road on national routes three and five.
Jose Cartellone Construcciones Civiles will handle works on a 780km stretch of work dubbed Road Corridor C, connecting Buenos Aires with Mendoza. And finally, a consortium of Paolini, Vial Agro and INC nabbed works for the 706km for the Road Corridor A, also in the Buenos Aires province.
The highways component of Argentina's PPP program encompasses three stages for $16.7bn in total investments projected over the next 15 years.