Mexican Energy and Infrastructure Finance Analysis (1)

Mexican Energy and Infrastructure Finance Analysis

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ijonline.com 3 June 2014

Welcome to IJGlobals Mexican Energy & Infrastructure Finance Analysis.The following pages will give you an idea of how nancing markets forenergy and infrastructure assets have evolved over the last seven years.

The report draws on the combined resources of Project Finance andInfrastructure Journal, now merged as IJGlobal. The merger has created themost powerful and reliable database in energy and infrastructure nance, anddraws on the unparalleled breadth and depth of IJGlobals news coverage.

Were bringing you this report in the lead up to our 10th AnniversaryMexican Energy and Infrastructure Finance Forum in Mexico City. As thefollowing report will illustrate, both the transport and social infrastructuresectors, and the power and oil & gas sectors boast promising pipelines.

Mexicos energy reforms have attracted considerable attention because of theamount of investment they may mobilise for the upstream oil & gas sector.But midstream, conventional power and renewables are all establishedsectors with strong international bank followings.

The bond market in Mexico is starting to become a meaningful part of bothgreeneld construction nancings and renancings of operational assets.It has taken some time for the countrys toll road sector to regain thecondence it had in 2006, but the ease with which issuers have recentlyraised bond debt and lightened the load on bank balance sheets is downto this improvement in bond market conditions.

Mexico still needs a more encouraging framework for social infrastructureand renewables development not to mention a larger cast of banks.But 2014 and 2015 promise a raft of engaged lenders looking over apromising pipeline of projects.

Tom Nelthorpe Manjot GobindpuriExecutive Editor Head of Research andIJGlobal Business Development

IJGlobal


IJGLOBAL DATA

Investment in Mexico 2007-2013

Source: IJGlobal Database (ijonline.com)

Mexico by the numbersMexican energy and infrastructure investment is picking up again. Oil and gas is taking overfrom transport as the countrys most promising sector. By Manjot Gobindpuri.

READY FOR THE REFORMSIJGlobals database shows that 11 Mexican energy and infrastructureprojects reached nancial close in 2013, with a total investment valueof $9.1 billion. This was a $3 billion increase from 2012, when 18deals accounted for a little over $6.1 billion in investment. A numberof big-ticket deals account for the increase in total investment,including the Etileno petrochemicals complex, which closed inJanuary 2013. Etileno was the largest private investment in a singleproject in Mexicos history, and its nancing included over $1.3billion in equity from sponsors Braskem and Idesa.

A look at changes in volumes shows that Mexico was asaffected by the 2008 crisis as any other jurisdiction. Between 2007and 2009 there was a drop in investment from a high of over $8.5billion in 2007 to a low of $2.6 billion, spread over 6 deals in 2009.The Mexican market stayed busy in 2008 however, with 20 deals

closing, the majority of them small deals in the oil & gas andtransport sectors.

The market recovered in 2010, with $6.1 billion in investmentfrom 15 deals. Deals included the $1.2 billion Jericho acquisition ofve CCGT plants and a gas pipeline in northeast Mexico and the$630 million PetroRig III project nancing. However levels ofinvestment continued to lag the pre-crisis period, as banks continuedto be cautious and stuck to club deals for key clients. The Eurozonecrisis halted the improvement in banks cost of funds that hadstarted in the second half of 2009.

Between 2010 and 2013 there was a general increase ininvestment from $6.1 billion in 2010 to $9.5 billion in 2013. Butdeal numbers and investment dropped between 2010 and 2011, asconcerns over the economy, security and the 2012 electionstranslated into market uncertainty.

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Investment value Deal count

Transport dominated the market in 2007, with over $6 billionin investment, the majority of which was due to the concession forFARACs rst package of roads. FARAC 1 was the largest infrastructuredeal to close in the Americas in 2007, but at signing it was also thelargest ever entirely Peso-denominated nancing for a private borrowerin Mexico. The sector maintained its dominance in 2008, though atalmost half the volume of the previous year, or $3.5 billion, with 9 dealsclosing. The sector maintained this steady decline over the next threeyears, as Mexicos SCT began to scale back its ambitions in the face ofmarket realities. In line with the wider trend of recovery in the market,

the sector saw an increase in investment between 2011 and 2013 with2013 seeing $3 billion worth of investment.

Renewables investment in the region came to the fore in 2010,with $1.4 billion in investment spread over 5 deals. 2012represented a high point for that sector, with over $2 billion ininvestment that included the Marena Renovables wind nancing.At signing Marena included the largest commercial bank tranchefor a wind plant in Mexico, and backs construction of the largestsingle-phase wind plant in Latin America. The project has sincesuffered from delays caused by local opposition.


IJGLOBAL DATA

Margin trends in Mexico and Brazil 2003-2012


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2003 2004 2005 2006 2007 2008 2009 2010 2011

Mexico power and renewables Mexico transport and PPPBrazil power and renewables Brazil Transport and PPP

Mexican financings by sector 2007-2013


PRICING TRENDSMexicos recent experience can be compared with regional rivalBrazil, which has similarly ambitious infrastructure plans, a morecommercially-minded national oil company, Petrobras, and adominant public development bank, BNDES.

The presence of BNDES does not give Brazilian debt margins anadvantage over Mexico, whose lenders and sponsors enjoy better access tointernationalcapitalmarkets.BanksfundingcostsarelowerinMexico,andwhile domestic lenders struggle to support newer sectors like renewables,they are able to devote resources to building up expertise in projectnance without worrying that a state-owned lender will crowd them out.

Average debt margins that IJGlobals database has capturedbroadly t in with the expected pattern. Across all industries and

regions margins fell between 2004 and 2005, some more sharplythan others (Mexican transport & PPP, for instance, fell from 325bpto 100bp). This trend generally continued across the sectors between2005 and 2006, although the Mexican transport sector (100bp to162bp) and Brazilian power and renewables sector (240bp to375bp) bucked the trend.

As expected, the average debt margins across all sectors rosesharply following the nancial crisis in 2008, with margins rangingbetween 250bp to 418bp in 2009. This upwards trend generallycontinued between 2009 and 2010, before generally dropping off thenext year (the exception being the Brazilian power and renewablesindustry) with deals such as the Santos Port expansion (650bp) andthe Dom Pedro toll road (500-550bp) adding to the spike.

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2007 2008 2009 2010 2011 2012 2013

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Social and

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Social and

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IJGLOBAL DATAWHICH LENDERS LASTED THE COURSE?Over the last 7 years European banks have dominated the Mexicanlending market. Most of these banks established their dominance inthe pre-2008 lending market, as the majority of European banksretreated from the market in the wake of the nancial collapse andsubsequent Eurozone crisis.

Santander leads the way during this period, with over $3.5billion committed to 25 transactions across all sectors. The gure is

close to double that of the second largest lender, BBVA, andSantanders role on the original FARAC nancing is a big factor inthis dominance. SMBC is also features on the list, highlighting theemergence of Asian banks in the Latin American market since 2008.Of the 11 deals in which the bank participated all but one (whichsigned in October 2008) are after 2008. Banorte is the only purelylocal lender on the list, after closing nine deals during this period.

Largest lenders 2013


The bank league table for 2013 highlights the retreat ofEuropean banks, with the majority of historically prominent playersnow missing. The growth of Asian banks is also noticeable, withMizuho joining Mitsubishi on the list of top lenders in the market.

Goldman Sachs leads the list, on the back of a big role on theConmex tollway renancing, with HSBC, Santander and BBVAmaintaining their presence in the market. HSBC was one of the moreactive lenders in the market, featuring on 4 deals, including Eoliatec

del Pacico,one of several wind farms in Oaxaca state. Two state-controlled lenders Bancomext and Banobras were among thelargest lenders in the market last year. While neither of them hasanything like the clout in their home market that Brazils BNDES has,the post-2008 period has forced them to step up and support projects.Their activities, coupled with the increased presence of Banorte (it lenton the same number of deals as HSBC in 2013) highlight theemergence of local lenders as serious players in the market.

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GoldmanSachs

HSBC Banorte Santander BBVA Banobras Mitsubishi UFJFinancialGroup

MizuhoFinancialGroup

NordLB BancoNacional deComercioExterior -Bancomext

Ives

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Largest lenders 2007-2013


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Santander BBVA WestLB HSBC Dexia Group NordLB Banorte ING Group SumitomoMitsui

FinancialGroup

CreditAgricoleGroup

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Total US$m Transactions


IJGLOBAL DATA

The Mexican project pipeline


The pipeline of deals in the Mexico is dominated by transport,with 16 deals in procurement. The pipeline contains three passengerrailways the Mxico-Toluca (Ps38 billion), Transpeninsular (Ps16billion) and high-speed railway Quertaro-Ciudad de Mxico (Ps43billion) alongside traditional highway and road projects. Mexicoarguably has the strongest pipeline of energy projects in LatinAmerica, including a mix of transmission, wind, and some hydroand conventional power, 20 projects in the pipeline. Wind accountsfor the bulk of potential renewables projects in Mexico.

The outlook for gas pipeline projects is promising. Mexico hasmade an expansion of its network of natural gas pipelines a priority,

as its long-awaited energy reform comes into effect. The countryhopes to unlock new investment in upstream, but until then needs toupgrade its network to receive imported gas. Imported gas made up3% of consumption in 2003, but 30% in 2012. Of note are is the$1.8 billion Ramones II pipeline. Pemex eventually decided to dividethe project into two separate deals the $1.1 billion RamonesNorth and the $795 million Ramones South. Alongside Ramones II,ve other gas pipeline projects worth $2.25 billion in Chihuahua,Durango and Sonora are expected to attract signicant internationalinterest from developers and lenders.

Mining

Oil & Gas

Power

Renewables

Social & defence

Transport

Water

Regulatory, nancial andenvironmental and social factors allplay a part in Mexican windssluggish growth.

Some developers, while they wait for anew regulatory framework to emerge, haveslowed work on new projects. GaussEnerga is among them.

In the last 20 years, the currentregulation has triggered $43 billion inprivate power investment, from which $7.5billion is related to renewable energy, saysHctor Olea, the president and chiefexecutive ofcer of Gauss in Mexico City.The new energy reform to be implementedin Mexico should not lose this momentum.

But the expected reforms may notresolve some issues that trouble all Mexicaninfrastructure developers. Mexico in general and Oaxaca in particular has yet toaddress long-standing rights-of-wayconcerns. Project sites near Oaxacan ejidos,or communal land used for agriculture byindigenous groups, have encounteredlengthy delays to their nancing and/orconstruction. Local opponents say thatdevelopers duped residents into agreeingunfavourable land deals.

Developers do not always see potentialopposition as a deterrentto projectdevelopment. Of course there is always thepossibility that this could happen to me, saysone international wind developer based inMexico.Each development has its owncomplications, but these are not viewed asinsurmountable. While the Marea project[which faces local opposition] serves as a redag, people are realising it could be an isolatedincident for that property and region.

SELF-SUPPLY STEPPING UPOne positive trend is the increasedwillingness of large private industrial usersto serve as offtakers for wind projects.Except for Brazil, which has somepotential

for inside-the-fence renewables development,it is unusual for renewables developers inLatin America to have that opportunity.

In Chile, developers and lenders have toget comfortable with projects selling theiroutput on the spot market, while in Colombia,public utilities dominate generation anddistribution. Large and creditworthy offtakersare most popular with developers, and are themainstay of renewables development in Brazil.

The Comisin Federal de Electricidad(CFE), Mexicos state-owned powercompany, has been central to the evolutionof Mexicos conventional independentpower industry. It is highly rated and enjoysa large bank following.

But the self-supply scheme has gainedmomentum in Mexico. Under the scheme,independent power producers (IPP) sellminority stakes in projects to offtakers,which are then deemed to be generatingtheir own power. In Mexico, the model hasconsiderable potential, given the presenceofpower-intensive industries such asmining,manufacturing and retail. Theseindustries face soaring energy prices, andtypically cross-subsidise lower tariffs forresidential users.

CFE may be the easy solution, butpeople may not fully appreciate the costsavings attainable through the self-supplyregime currently in place, says AlexandroPadrs, counsel at Shearman & Sterling inNew York. Its only with the energy reformthat a true cultural tipping point will bereached in the power sector. To date,cement producer CEMEX and retailersGrupo Bimbo and Walmart have signed self-supply contracts.

But lenders note that there is not aninnite supply of well-rated offtakers inMexico, and nancings with lower-ratedofftakers are difcult to structure.

The pricing mechanisms for self-supply projects can be tricky, says a banker

at an international lender active in Mexico.You need to establish a price at a discountto the CFE tariff, which moves every month.Some are structured at a xed rate at theoutset for a project, but some are structuredaround a discount to a variable price, whichcreates uncertainty for lenders.

ADDING LIQUIDITYMexican banks have struggled to meet thedemands of renewables projects, mostlybecause they lack experience with the sectorand the ability to model project cashows.But multilateral banks, particularly but notexclusively the Inter-American DevelopmentBank and the International FinanceCorporation, appear, for now, to be llingany gaps.

The North American DevelopmentBank (NADB) is also present to providecomfort to otherwise nervous commerciallenders, though the bank is taking smallerand smaller tickets on each successivenancing that it joins. Soon these banksthat you see joining us in these deals will bedoing deals on their own, says AlexHinojosa, deputy managing director at theNADB in San Antonio, Texas.

Mexicos government has repeatedlydecided against providing direct incentivesto renewables generators. The country lacksa wholesale power market, and whileindustrial users face high tariffs, only insmall corners of the country where dieseldominates generation is wind competitive.

The future redistribution of theenergy matrix will translate into renewableshaving a greater priority, which will attractmore commercial entities and lenders todevelop renewable assets, says Shearman &Sterlings Padrs. The only thing [that]could undercut this redistribution is aninux of shale gas, which could redirect thematrix back to natural gas, due to anincreased supply at inevitably lower prices.In order to avoid that, Mexico needs cleanenergy mandates and policies.

A number of ambitious nancings forwind assets are near market, includingprojects outside Oaxaca. Oak Creek, throughits Mexican subsidiary Frontera Renovable, isunderstood to be developingthe rst twophases of its maiden 400MW Mexican windproject, and Mxico Power Group (MPG) isdeveloping up to 1GW of wind capacity inthe short- to long-term.

This is an abridged version of an articlethat appeared in IJGlobal magazine's

June 2014 issue


Resource rich,development poor

MEXICAN RENEWABLES

By most accounts, Mexico should be a global leader in winddevelopment. But uncertain policy, mounting social oppositionand liquidity constraints have hampered growth. By Rosie Fitzmaurice.

Top 10 MLAs Latin America 2013Rank Company Lending

1 Itau-Unibanco 889

2 Sumitomo Mitsui Financial Group 662

3 HSBC 584

4 Goldman Sachs 529

5 Corpbanca 501

6 Mizuho Financial Group 447

7 Mitsubishi UFJ Financial Group 438

8 Citigroup 104

9 Santander 357

10 Bradesco 338

Top 10 Sponsors Latin America2013Rank Company Lending

1 Odebrecht 2,918

2 AES Corporation 2146

3 Obrascon Huarte Lain (OHL) 1951

4 Sete Brasil 1250

5 Antofagasta PLC 1145

6 Blackstone 1098

7 ICA 740

8 Infraero 729

9 Invepar 684

10 Pacific Infrastructure 620


IJGLOBAL DATA

Closeddeals inLatinAmerica2013(byvalueof investment)


Argentina

Brazil

Chile

Columbia

Mexico

Peru Uruguay

Argentina

Brazil

Chile

Columbia

Mexico

Peru

Uruguay

Closeddeals inLatinAmerica2013(byvalueof investment)


Argentina

Brazil

Chile

Columbia

Mexico

Peru

Uruguay

Argentina

Brazil

Chile

Columbia

Mexico

Peru

Uruguay

Details of all closedfinancings and launchedprojects at

ijglobal.com

Sempra US Gas & Power is nearing close ona debt package for the 156MW EnergaSierra Jurez 1 wind project in BajaCalifornia, Mexico.

Among the lenders looking at thedeal are:BBVAMUFGMizuhoNacional Financiera (Nansa)North American Development BankSMBC

Sierra Jurez, located in LaRumorosa, will sell its output across theborder with the US to San Diego Gas &Electric (SDG&E), a Sempra-owned utility.SDG&E has a 20-year power purchaseagreement with Sierra Jurez.

The project is located just south of theUS-Mexico border, about 112.7km east of SanDiego. It will connect to the existing SouthwestPowerlink at SDG&Es proposed ECOsubstation in eastern San Diego county througha new cross-border transmission line.


IJGLOBAL NEWS COVERAGE

Mexican state-owned oil companyPetrleosMexicanos (Pemex) has issued a request forproposals for the nancing of the north andsouth components of the nearly $2 billionsecond phase of the Los Ramones pipeline.The RFP is understood to have been issuedon 14 March 2014.

Banks such as MUFG, Bancomer,Crdit Agricole, HSBC, Mizuho, Nord/LB,Socit Gnrale and Sumitomo MitsuiBanking Corporation (SMBC) are amongthe banks expected to respond.

According to market observers Pemexis pushing for a tenor of between 18 and 20years at 200bp over Libor, but banks are

hoping for nearer 250bp. They suggestobtaining such a long tenor will bedependent upon signicant participationfrom development nance institutions andexport credit agencies.

Pemex is understood to have hiredboth BNP Paribas and Santander as adviserson the nancing of both sections of the LosRamones II natural gas pipeline. BNPParibas will liaise with international lenders,while Santander will liaise with the local andregional development banks.

The pipeline was split into two phases,the north and south sections,in October. Thenorth section, which includes 60% of the

original project (441km), is to be built andoperated by Pemex subsidiary TAG Pipelinesin association with Gasoductos de Chihuahua,a joint venture between Pemex and SemprasMexico subsidiary IEnova. It will requireabout $1.05 billion to develop.

GDF Suez and TAG Pipelines arebuilding the southern component, whichwill run 287km and will require investmentof around $795 million.

Before Pemex took the decision tosplit the pipeline, the project was to benanced with a six-year mini-perm. Pemexis aiming to achieve a mirrored nancingpackage for each project.

The newly launched IJGlobal will bring you more news, data and continue to break moreexclusives across the globe. The below are examples of some recent exclusive news storiescovering the Mexican market available at IJGlobal.com.

RFP out to banks for Los Ramones II north and south24 March 2014

Sempra nears Mexico wind close24 April 2014

For moreinformationaboutIJGlobalplease visitwww.ijonline.com

[email protected]

+44 (0) 20 7779 8284

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