Mexico kick-started its infrastructure investment drive at the end of 2007, piling political pressure on other governments to follow suit, and serving as a litmus test of the depth of nascent domestic markets and foreign investor sentiment.
Last October, Mexico sought an historic break from the past by reselling toll roads that were taken over after the 1994 economic crisis. It successfully launched its first auction of the so-called FARAC concession in a record Ps44 billion ($4 billion) deal – the largest project loan in the country as well as the largest ever peso-denominated offer.
Not bad considering that, for large western projects at the time, the door was firmly shut.
“For many people this was an eye-opener because it showed that financial institutions were able to arrange such a large peso-denominated loan,” Gerardo Rodriguez, deputy under-secretary for public credit at the Mexican finance ministry, tells Emerging Markets.
The government has subsequently created a national infrastructure fund, hoped to be worth Ps270 billion ($25 billion) by 2013, investing in roads, airports, ports and sanitation. The precise capital structure to maximize this cash and encourage investment for riskier or lower-yielding projects has yet to be determined, but Rodriguez is confident that markets will be appropriately flexible. “The national fund will set up policy guidelines and vehicles to allow private investment to work with the equity capital.
“We could participate in other parts of the capital structure with guarantees or subordinated debt or even channel non-refundable money with projects that offer an economic return, but are a priority from a social standpoint,” he says.
He claims long investors will stay faithful despite Mexico’s grave correlation with US business cycles, but he admits equity to debt ratios will have to err on the side of caution. “We can tell that equity infrastructure investors and global dedicated investors are just as willing to participate. This, of course, needs to be supported by principal debt from financial institutions that can be unloaded in the marketplace in the form of securitizations. Whether financial institutions are as willing and able to invest in these projects as they were before remains to be seen.”
But with the national fund’s start-up money consisting of a hefty Ps40 billion, the shallow peso loan and bond mart could be overwhelmed with the supply of peso-denominated paper.
“As time goes by, more and more projects will have significant refinancing exposures, and this will expose local markets to the full. We have to be prepared for this,” says Adolfo Osorio, head of structured finance at BBVA Bancomer in Buenos Aires.
To ensure new issuance is unveiled in a disciplined time frame, one senior Mexican banker believes the government can only introduce one or two large concessions per year and in consequence fail to meet its own ambitious targets.
New hope
Mexico is hostage to jittery foreign investors, with a wavering appetite for pesos, because local institutional buyers do not currently dominate the landscape. But there is now some hope that Afores, Mexico’s privatized pension funds, will gradually offer investment to meet the gushing supply of new projects.
These funds are cautiously changing their portfolio composition, slowing the buying of inflation-linked and long-term paper. But for now these investments are exclusively concentrated in top investment grade corporate and government securities, and it is unclear whether they will enthusiastically diversify into the asset class despite its inherent compatibility.
Scott Swenson, partner at private equity firm Conduit Capital Partners cautions: “You do not want to jump-start markets by force-feeding pension funds paper for project deals. They need to slowly develop their risk management strategies.”
Without big domestic institutional buyers and more cautious foreign investment this year, Mexico’s infrastructure drive could be derailed – and with it the hopes of the whole region. —S.V.