LatAm PF embraces more local currency options
August 9, 2018 |
Brazil's CELSE power project and a number of Colombian 4G efforts underscore growing interest in hybrid structures, sources
Investors are growing increasingly comfortable with local currency alternatives in project bonds, a structure growing across LatAm infrastructure initiatives.
Whether it is bank loans or securities, projects from Brazil to Colombia are adopting the structure as a means to diversify the investor base and widen the pool of funding options.
Specifically, bankers are either:
1 - underwriting project bonds instead of utilizing orthodox project financing through syndicated loans or
2 - tapping into a local currency market that was once considered untouchable even by sovereign issuers
Hybrid transactions, involving bank loans and bonds, has also allowed LatAm projects to import themes prevalent in the US infrastructure space, according to two project finance bankers.
Rather than applying traditional structures, or "cookie cutter" models, as one banker puts it, the flexibility in local currency options has enabled sponsors and financial institutions to navigate project risk differently.
Local currency mitigates capital flow risk, decreases the dependency on international lenders, lowers FX risk and current account imbalances.
And with their deeper pockets, institutional investors, both local and international, are the ideal target for projects. Sources have said these longer-term structures are being designed to extract support from this market base.
While project bonds make up less than 15% of total project finance, one of the more complex instruments issued in local currency in the past year is the CELSE Port of Sergipe project in Brazil, which reached financial close in April.
CELSE issued a 14-year BRL3.37bn ($987m) senior secured note for its 1.5 GW Porto de Sergipe gas-to-power plant 10km from Aracaju, the capital of the state of Sergipe, Brazil.
The bond includes an insured 144A/Reg S portion, covering 95% of the total issuance, guaranteed by Swiss export credit agency SERV while the remaining BRL168.5m portion is uninsured.
The hybrid facility is also becoming a consistent model in Colombia's 4G toll road initiative and may also take shape in Argentina, which has used the Colombian model as a benchmark for its own infrastructure pipeline.
As witnessed with Colombia's Ruta al Mar project, the sponsor Construcciones El Condor, raised COP522bn from the sale of long-term UVR-indexed notes. The US 144A issue with a local currency tranche proved beneficial for peso-denominated projects like roads, transportation, ports and energy.