By Lucy Conger An overwhelming majority of Panamanians finally voted last October to go ahead with a plan to expand their celebrated canal, nearly 70 years after the new set of locks was first proposed. The news was met with a mixture of patriotic pride on the one hand and a degree of market scepticism on the other: for Panama, much is riding on whether the Panama Canal Authority (ACP) , a semi-autonomous government agency, which has run the canal since the United States handed it over to Panama in 1999, has done its maths right.
If demand rises as forecast, if the expansion can be delivered on budget, and if shippers do not cringe at higher tolls, the canal will be even better business for the government. But as importantly, large infrastructure projects often go over budget. Ten years ago, when the project was last studied in detail, the estimated price tag was $12 billion, possibly rising to $15 billion. The canal authorities now think they can do it within $5.25 billion. The problem is, if there are financing problems or if demand drops off, creditors cannot lay claim to the canal or its future revenues.
Instead, the government of Panama – where annual GDP is $15 billion and public debt is roughly $10 billion – will have to pick up the tab. Indeed, some market analysts are only too quick to voice their reservations: “The canal project is grossly underestimated; it will run seriously over budget; and for a country so heavily indebted as Panama, it is a risk,” says Walter Molano, director of research for BCP Securities. Borrowing must come on stream by 2009 to fund the peak period of construction of the new locks and navigation channel. In the wake of its aggressive proposal to hike tolls last month, ACP now forecasts that its borrowing needs may drop.
“In the final analysis, the ACP may not need to secure $2.3 billion in financing,” ACP officials tell Emerging Markets. Delight Despite the possibility of cost overruns – and whether or not the borrowing comes in at $2.3 billion (one source believes the new figure, after toll hikes, could be closer to $2 billion) – the prospect of a large commercial financing has met with unbridled enthusiasm from bankers since the ACP unveiled its Master Plan on April 24, 2006.
This will be the first time the canal goes to the market. Under the US administration until 2000, the waterway was subsidized, and since its handover, the canal has operated with a profit. Citigroup president Charles Prince visited the Miraflores locks last month, remarking that his bank “is very proud to have participated in this great project from the time of its construction”. The expansion comes at a time of high liquidity and against a backdrop of a boom in shipping. Naturally, the waterway’s strategic location for Asian trade flows to the US east coast makes it a good bet.
On February 7 the ACP selected Japan’s Mizuho Corporate Bank as its financial adviser. Mizuho will begin talks with the ACP in March about the financing strategy for the seven-year project, according to Masatoshi Abe, head of project finance, Americas, at Mizuho. “For a first-timer [seeking lending], as financial adviser we will have to carry out due diligence on behalf of the company and make sure the market understands the company’s operations,” Abe says. Fifteen of the world’s leading specialists in project finance bid for the financial advising post, including Calyon, Citigroup, BNP Paribas, HSBC, JP Morgan, Lazard, Societe Generale, sources say. Mizuho won the bidding judged on technical and economic grounds with a low bid of $4.4 million over five years – an amount considered low by competing bidders.
“For ACP, giving the contract to the lowest bidder makes them look very good” even though the sum paid on the contract is too small to bring down overall costs of the expansion, says a source who spoke on condition of anonymity. Mizuho is expected to release the structures for financing the expansion by the last quarter of 2007 or the first quarter of 2008. The canal authority’s CFO Jose Barrios tells Emerging Markets that credit ratings will be sought for the canal starting late April. Bond bonanza “All capital-raising products will be open to them – whether bonds, export finance, syndicated bank loans, securitized flows – they will all be in play,” says Raul Ardito-Barletta, executive vice-president for Central America and the Caribbean with BNP Paribas in Panama.
It will be part of Mizuho’s job to determine the mixture and amount of credit instruments the canal should use when going to market. Whatever the final figure, it will be a huge debt, and the ACP and the eventual lenders will want the best credit rating possible on canal debt to lower the interest payments. ACP debt cannot be rated investment grade because the authority, although autonomous, is wholly owned by the government of Panama. Credit rating agencies have said they would consider ACP debt as a contingent liability of the indebted government, which is rated below investment grade.
Political risk poses another hurdle to getting a better rating. “The canal expansion project, spanning seven years, will occur during three different presidential terms and, though not our base case, could potentially be subject to changes in legislation under different governments,” says Theresa Paiz, Panama analyst for Fitch Ratings. ACP executives are not commenting on financing plans. Market analysts and sources close to the project believe that the financing package will include a mechanism to secure future toll receipts in a move to get a better credit rating. A steady flow of cash revenues is assured because shipping companies must pay tolls to the ACP before being allowed to transit the canal.