Infrastructure struck a chord with many participants at the Securitization and Structured Finance in Latin America (SiLAS) conference in late May, organized by Euromoney Seminars and LatinFinance.
The region’s outsize needs in roads, ports and railways paired with innovative ways to finance them have translated into a growing sector for securitization.
One investor who has been mulling over ways to get more involved in infrastructure is Lee Meddin, global head of structured and securitized products at the International Finance Corporation (IFC). Infrastructure has not been a traditional focus of the multilateral’s structured finance team – of the roughly $15 billion that it has committed on balance sheet through its guarantee product as well as direct funding, less than 5% falls into the infrastructure bucket.
Meddin said that it could increase involvement by offering a new back-ended guarantee product for Greenfield projects.
A standard guarantee kicks in on the first day of the deal and covers a certain percentage of the notes for the life of the transaction. Since at launch the chances of a deal’s default are higher in its final years than the earlier ones, the IFC receives a margin that overpays early on and underpays toward the end, Meddin said.
“We’re willing to take the long-dated credit risk, but others have to be willing to take the liquidity risk, which generally isn’t easy in these markets,” he added.
Since in a Greenfield project the construction risk is front-loaded, the multilateral has discovered that a back-end guarantee might be most effective. The margin would be reasonable since the multilateral wouldn’t need to be compensated at all for the construction risk. Ideally the guarantee, kicking in years into the transaction, would accrete so as not to incentivize a default. The guarantee has already received internal approval and would be available in both local and foreign currency deals. “I’ve spoken to some institutional investors, and they seem excited by it,” Meddin said.
PIMCO Executive Vice President Brigitte Posch also has infrastructure on her mind. She manages a fund devoted to the sector. “While it doesn’t need to be all project finance, we do look into project finance,” Posch said.
She noted that the volumes in some recent transactions from Latin America bode well for liquidity. The Odebrecht drill ship deal from late last year is one example. Issued for $1.5 billion, that transaction is ultimately backed by drill ship operating contracts between Petroleos de Brasil and operator Odebrecht. Sources in the past have said that having an offtaker like Petrobras has gone a long way in making investors comfortable with this brand of transaction.
“(These volumes) can be done, and these are the sorts of names you want to come to the capital markets,” Posch added.
In another area of infrastructure, she has found value in Peruvian bonds backed by payments from the government to highway operating companies. But these have not been necessarily priced right in the primary market, she said. “They used to price at about 100 basis points over the sovereign, and I bought them at 300 points.”
Standard & Poor’s Managing Director Juan De Mollein said that the enthusiasm expressed by some SiLAS participants about infrastructure was heartening, but that the volumes needed still present a tremendous challenge. Among other obstacles, the market faces the withdrawal of monolines, which had played a leading role in financing this sector, and the difficulty in obtaining currency swaps that have the duration required for long-term infrastructure projects.