The Camisea consortium, which is building a gas liquefaction plant in Peru, yesterday made public plans to restructure its financing package to take account of the weakness of the dollar. Instead of placing a $350 million dollar bond in Peru, it will take an extra $150 million from banks, in IDB-backed “B” loans, and split the remainder between bonds denominated in Peruvian soles and dollars.
The sol has already appreciated by more than 8% against the dollar this year. The switch highlights a sea change in the financing of long-term investment projects in Latin America, as investors prefer local paper to dollar-based bonds. The historic trend in Latin America – vulnerability to currency instability, which pushed many dollar-denominated projects into default during the 1994 economic crisis – is being reversed.
Analysts pointed out that Latin American governments and corporates, fearful of the volatile dollar despite higher domestic interest rates, are also opting to raise local debt. Pedro Batalla, partner at Santander Private Equity said: “Governments and financiers have been very good at raising debt in their home markets as they are trying to be less exposed to dollar weakness,” said.
Cherian George, head of Americas project finance at Fitch ratings agency, said: “Dollar instability in the short run makes the debt-to-equity composition variable, and is forcing financiers to place more expensive hedges to mitigate the risks.”
The $4 billion Camisea project is led by Dallas-based Hunt Oil, whose chief executive Ray Lee Hunt is a long-time adviser to president George W. Bush. Other partners are Marubeni of Japan, South Korea’s SK Corporation and Spain’s YPF.
In December 2007 Camisea received the IDB’s biggest ever loan to the private sector, of $400 million, plus approval of a syndicated “B” loan, which now totals $400 million. There are another $1.25 million in loans from the IFC, US Ex-Im Bank, Korean Ex-Im Bank and SACE of Italy. The structure announced yesterday entails adding to the “B” loan instead of placing the $350 million in soles and then swapping it to dollars. The consortium will place $100 million in dollar bonds and the equivalent of $100 million in soles, which it will then swap. Peru’s Banco de Credito is leading the process.
Jozef Henriquez, head of the IDB’s Syndication Unit, told Emerging Markets: “Peru used to have a very vibrant dollar market, but now there has been a change and investors want local paper.” Meanwhile a report by Cambridge Resources International, a development project advisory firm, has accused Camisea and its multilateral backers of plundering Peru’s natural resources.
The gas should be used for domestic consumption instead of being liquefied for export, argues author Glenn Jenkins, economics professor at Queen’s University, Canada. “It is complete lunacy to export this gas. They are burning up the inheritance of future Peruvians. It is 100% against public policy,” Jenkins told Emerging Markets.
The Peruvian government adopted legislation allowing gas exports if there is a 20-year assured domestic supply. But according to Jenkins, two decades’ worth of gas for Peru’s domestic needs is not nearly enough to make the exports economically justifiable.
The country will incur a net $2.82 billion loss, with calculations based on projected export revenues from Camisea and the estimated costs of Peru’s future imports. Jenkins says Peru should keep its gas for domestic use and support lower electricity prices.