Download Infrastructure Bonds in Chile

PPP in Chile
The Toll Road Financing Experience
Jorge Domínguez
Consultant, Financial Advisor
Establishing Public-Private Partnerships
in Transport Sector in The Russian Federation
Moscow, March 3rd 2005
The Chilean Concession Program
Origins and Objectives
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Lack in infrastructure and shortage of public resources to make the investments
 More than US$5 billion investment program required
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The Chilean Government designed a mechanism that allows the participation of
private sector in the construction, maintenance and operation of infrastructure
Three main objectives were:
– Use private sector expertise and resources to develop and finance public
works
– Externalize construction and operation of the facilities, improving service level
and security
– Free public resources to focus in projects and programs with higher social
priorities
Some projects (ones with less traffic or expected income) received a subsidy
1
The Chilean Concession Program
Successful Awarding
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The Chilean government has awarded in open bidding processes
concessions for most of Route 5 which links the country from north to
south (average stretch of 200 kms and a US$250 million investment)
and 4 highways linking Santiago to the coast and to Argentina
Also were awarded 4 urban concessions in Santiago (average stretch
of 30 kms and a US$400 million investment)
Most of the concessions have been awarded to international sponsors
Airports, water works, and jails have also been and are still being
assigned under the concession mechanism
The Concessions Program has allowed to completely update the
infrastructure of the country to a modern standard
Financing needs
Leveraging the Sponsors’ Investment
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Considering minimum equity requirements of 10 -15%, at least US$3.5 billion
financing was required
Ideal financing should consider
– long tenors consistent with life span of the concession
– customized amortization schedule, allowing for interest capitalizacion and
grace period
– local currency, matching toll income with debt profile with no currency
mismatch
– fixed interest rate, mitigating economic cycle exposure
– project risk, to be handled by specialized entity at minimum cost
– limited recourse to the sponsors, increasing competition in concession
awarding process and return on equity
Available sources of financing
Debt market players’ limitations
• International banks and fixed income investors
– Not in local currency
• Local Banks
– floating rate, short term
• Local institutional investors (pension funds and life insurance cos.)
– Project risk
 Local institutional investors were the best fit if project risk was
eliminated or at least mitigated
Available sources of financing
Local Institutional Investors
60.000
50.000
40.000
30.000
20.000
10.000
Life Insurers
AFP
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
0
1988
•
Total assets
1987
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Life Insurance Companies receive
retirement funds and provide annuities
to retired people
They often select longer tenors in order
to hedge their liabilities
Life Insurance Companies currently
manage approximately US$15 billion,
17% of GDP.
1986
•
1985
•
Since 1981 the privately managed pension fund system (AFPs), based on
individually funded pensions, gradually become a replacement of the State in the
role of providing pensions under PAYG system. They monthly receive important
resources from employees, and invest in capital markets
Currently, the AFP’s portfolio is composed by variable and fixed income
instruments, with a total portfolio value of approximately US$58 billion, 67% of
GDP
US$ millions
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Structuring the financing
Solving the Project Risk dilemma
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Sponsors and advisors focused in the search of players with capacity in
understanding and absorbing project risk
As Chile’s sovereign rating reached a solid “A-” investment grade, monoline
insurance companies became available to enhance the issuance of local securities
providing their guarantee.
Monoline insurance companies provide a guarantee that covers the timely
payment of 100% all future interest and capital on the financing
All parties involved: Sponsors, market regulators, monoline insurance companies
and local long term investors worked a solution to transfering risks inherent to this
financings to the best able to manage it
Main benefits of the structure:
– Sponsors: access to the local long-term market, higher leverage, reduced risk
and improved return on equity
– Institutional Investors: a new class of securities with higher rating than the
government and at higher spread.
– Monoline Cos.: received significant compensation for their expertize in
handling project risk compared with more developed markets.
Development of infrastructure bonds
The long road to the market
1995
•Chile was rated
“A-” opening the opportunity
for Monoline Insurers
to consider operations
in the country
1996
1997
•The first Concessions
awarded began looking
for long term financing.
The first was
Talca - Chillán
1998
•In November 1998
the first Infrastructure
Bond of Latin America
was issued
(US$150 million).
1999
•July 2000 the 2nd
Infrastructure Bond
is issued
(Insurer: XL Capital):
Collipulli-Temuco
US$208 million
2000
2001
2002
•1st semester 2001 the 3rd
Infrastructure Bond
is issued (Insurer: XL Capital):
Chillán-Collipulli US$210 million
•The Concessionaire iniciated the
structuring the of the financing.
conversations with the
consortium MBIA-AMBAC.
Due diligence of legal, regulatory and institutional
frameworks well as political risk. Legal protection
of private property and strength of concession
contracts
Santiago-Valparaíso US$280 million
Insurers: IADB/FSA
Documentation drafted under local law, concession
contract and capital market provisions
Four urban toll roads US$500 million
Regulators and rating agencies to approve the
“100% coupon payment guarantee” concept
Tax and bureaucratic issues to be addressed
Institutional investors educated on benefits of the
guarantee and that no project risk was passed on
to them
Santiago San Antonio US$135 million
Insurer: FSA
Rutas del Pacífico: case study
1999
2000
Financial advisor is hired
Sponsors begin by mid
1999 assessing the market for
financing
The Concessionaire has
not decided yet on financing
Insured bonds are chosen as
best solution
The search for an insurer
begins
Size of financing made
desirable support from
multilateral agency
2001
2002
April 9: the Bond was placed
Mid 2001: IDB (*) and FSA are hired
as insurers.
•Term Sheet Agreed
•Beginning of the due diligence process
•Beginning of the documentation process
US$280 million
the largest bond placement in
the local market.
Bond pricng:110 bps above
government debt
The structuring process took 1 year.
Some major issues to solve were:
•Issue:The original traffic
study considered much higher
GDP growth, and traffic and lower evasion.
Solution: Adjustment of the financial
structure (required ratios, guarantees etc.)
to the new scenario.
•Issue Complementary Works were
•Issue: The term of the concession is variable:
demanded by the MOP, making the
financing needs larger.
Solution: implementation of
a mechanism of mandatory prepayment to match
Debt/Concession.
Solution: optimization of
debt repayment profile
+additional guarantees.
(*) IDB: Inter American Development Bank
Long Term Toll Road Financing
Basis for success
 Strong legal, regulatory and institutional frameworks as well reduced political risk.
 Legal protection of private property
 Open and transparent bidding processes for concession awarding
 Concession Sponsors with recognized technical reputation and strong financial
backing
 Concession contracts that can be legally enforced
 Investment grade level rating for the country and local investment grade for the
project ( sponsor support )
 Increasing availability of local currency long term funding
 Capacity to attract entities such as monoline insurers or multilateral organizations
to take project risk and provide guarantee of timely payment of debt ( at least for
initial debt issues )