Mexican Energy

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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 fnancing markets for
energy and infrastructure assets have evolved over the last seven years.
The report draws on the combined resources of Project Finance and
Infrastructure Journal, now merged as IJGlobal. The merger has created the
most powerful and reliable database in energy and infrastructure fnance, and
draws on the unparalleled breadth and depth of IJGlobals news coverage.
Were bringing you this report in the lead up to our 10th Anniversary
Mexican Energy and Infrastructure Finance Forum in Mexico City. As the
following report will illustrate, both the transport and social infrastructure
sectors, and the power and oil & gas sectors boast promising pipelines.
Mexicos energy reforms have attracted considerable attention because of the
amount of investment they may mobilise for the upstream oil & gas sector.
But midstream, conventional power and renewables are all established
sectors with strong international bank followings.
The bond market in Mexico is starting to become a meaningful part of both
greenfeld construction fnancings and refnancings of operational assets.
It has taken some time for the countrys toll road sector to regain the
confdence it had in 2006, but the ease with which issuers have recently
raised bond debt and lightened the load on bank balance sheets is down
to this improvement in bond market conditions.
Mexico still needs a more encouraging framework for social infrastructure
and renewables development not to mention a larger cast of banks.
But 2014 and 2015 promise a raft of engaged lenders looking over a
promising pipeline of projects.
Tom Nelthorpe Manjot Gobindpuri
Executive Editor Head of Research and
IJGlobal Business Development
IJGlobal
ijonline.com 4 June 2014
IJGLOBAL DATA
Investment in Mexico 2007-2013
Source: IJGlobal Database (ijonline.com)
Mexico by the numbers
Mexican energy and infrastructure investment is picking up again. Oil and gas is taking over
from transport as the countrys most promising sector. By Manjot Gobindpuri.
READY FOR THE REFORMS
IJGlobals database shows that 11 Mexican energy and infrastructure
projects reached fnancial close in 2013, with a total investment value
of $9.1 billion. This was a $3 billion increase from 2012, when 18
deals accounted for a little over $6.1 billion in investment. A number
of big-ticket deals account for the increase in total investment,
including the Etileno petrochemicals complex, which closed in
January 2013. Etileno was the largest private investment in a single
project in Mexicos history, and its fnancing included over $1.3
billion in equity from sponsors Braskem and Idesa.
A look at changes in volumes shows that Mexico was as
affected by the 2008 crisis as any other jurisdiction. Between 2007
and 2009 there was a drop in investment from a high of over $8.5
billion 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 and
transport sectors.
The market recovered in 2010, with $6.1 billion in investment
from 15 deals. Deals included the $1.2 billion Jericho acquisition of
fve CCGT plants and a gas pipeline in northeast Mexico and the
$630 million PetroRig III project fnancing. However levels of
investment continued to lag the pre-crisis period, as banks continued
to be cautious and stuck to club deals for key clients. The Eurozone
crisis halted the improvement in banks cost of funds that had
started in the second half of 2009.
Between 2010 and 2013 there was a general increase in
investment from $6.1 billion in 2010 to $9.5 billion in 2013. But
deal numbers and investment dropped between 2010 and 2011, as
concerns over the economy, security and the 2012 elections
translated into market uncertainty.
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2007 2008 2009 2010 2011 2012 2013
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Investment value Deal count
Transport dominated the market in 2007, with over $6 billion
in investment, the majority of which was due to the concession for
FARACs frst package of roads. FARAC 1 was the largest infrastructure
deal to close in the Americas in 2007, but at signing it was also the
largest ever entirely Peso-denominated fnancing for a private borrower
in Mexico. The sector maintained its dominance in 2008, though at
almost half the volume of the previous year, or $3.5 billion, with 9 deals
closing. The sector maintained this steady decline over the next three
years, as Mexicos SCT began to scale back its ambitions in the face of
market realities. In line with the wider trend of recovery in the market,
the sector saw an increase in investment between 2011 and 2013 with
2013 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. 2012
represented a high point for that sector, with over $2 billion in
investment that included the Marena Renovables wind fnancing.
At signing Marena included the largest commercial bank tranche
for a wind plant in Mexico, and backs construction of the largest
single-phase wind plant in Latin America. The project has since
suffered from delays caused by local opposition.
ijonline.com 5 June 2014
IJGLOBAL DATA
Margin trends in Mexico and Brazil 2003-2012
Source: IJGlobal Database (ijonline.com)
0
100
200
300
400
500
600
700
2003 2004 2005 2006 2007 2008 2009 2010 2011
Mexico power and renewables Mexico transport and PPP
Brazil power and renewables Brazil Transport and PPP
Mexican financings by sector 2007-2013
Source: IJGlobal Database (ijonline.com)
PRICING TRENDS
Mexicos recent experience can be compared with regional rival
Brazil, which has similarly ambitious infrastructure plans, a more
commercially-minded national oil company, Petrobras, and a
dominant public development bank, BNDES.
The presence of BNDES does not give Brazilian debt margins an
advantage over Mexico, whose lenders and sponsors enjoy better access to
international capital markets. Banks fundingcostsarelowerinMexico, and
while domestic lenders struggle to support newer sectors like renewables,
they are able to devote resources to building up expertise in project
fnance without worrying that a state-owned lender will crowd them out.
Average debt margins that IJGlobals database has captured
broadly ft in with the expected pattern. Across all industries and
regions margins fell between 2004 and 2005, some more sharply
than others (Mexican transport & PPP, for instance, fell from 325bp
to 100bp). This trend generally continued across the sectors between
2005 and 2006, although the Mexican transport sector (100bp to
162bp) and Brazilian power and renewables sector (240bp to
375bp) bucked the trend.
As expected, the average debt margins across all sectors rose
sharply following the fnancial crisis in 2008, with margins ranging
between 250bp to 418bp in 2009. This upwards trend generally
continued between 2009 and 2010, before generally dropping off the
next year (the exception being the Brazilian power and renewables
industry) with deals such as the Santos Port expansion (650bp) and
the Dom Pedro toll road (500-550bp) adding to the spike.
0
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ijonline.com 6 June 2014
IJGLOBAL DATA
WHICH LENDERS LASTED THE COURSE?
Over the last 7 years European banks have dominated the Mexican
lending market. Most of these banks established their dominance in
the pre-2008 lending market, as the majority of European banks
retreated from the market in the wake of the fnancial collapse and
subsequent Eurozone crisis.
Santander leads the way during this period, with over $3.5
billion committed to 25 transactions across all sectors. The fgure is
close to double that of the second largest lender, BBVA, and
Santanders role on the original FARAC fnancing is a big factor in
this dominance. SMBC is also features on the list, highlighting the
emergence of Asian banks in the Latin American market since 2008.
Of the 11 deals in which the bank participated all but one (which
signed in October 2008) are after 2008. Banorte is the only purely
local lender on the list, after closing nine deals during this period.
Largest lenders 2013
Source: IJGlobal Database (ijonline.com)
The bank league table for 2013 highlights the retreat of
European banks, with the majority of historically prominent players
now missing. The growth of Asian banks is also noticeable, with
Mizuho joining Mitsubishi on the list of top lenders in the market.
Goldman Sachs leads the list, on the back of a big role on the
Conmex tollway refnancing, with HSBC, Santander and BBVA
maintaining their presence in the market. HSBC was one of the more
active lenders in the market, featuring on 4 deals, including Eoliatec
del Pacifco,one of several wind farms in Oaxaca state. Two state-
controlled lenders Bancomext and Banobras were among the
largest lenders in the market last year. While neither of them has
anything 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 lent
on the same number of deals as HSBC in 2013) highlight the
emergence of local lenders as serious players in the market.
0
100
200
300
400
500
600
Goldman
Sachs
HSBC Banorte Santander BBVA Banobras Mitsubishi UFJ
Financial
Group
Mizuho
Financial
Group
NordLB Banco
Nacional de
Comercio
Exterior -
Bancomext
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Largest lenders 2007-2013
Source: IJGlobal Database (ijonline.com)
0
500
1000
1500
2000
2500
3000
3500
4000
Santander BBVA WestLB HSBC Dexia Group NordLB Banorte ING Group Sumitomo
Mitsui
Financial
Group
Credit
Agricole
Group
0
5
10
15
20
25
30
Total US$m Transactions
ijonline.com 7 June 2014
IJGLOBAL DATA
The Mexican project pipeline
Source: IJGlobal Database (ijonline.com)
The pipeline of deals in the Mexico is dominated by transport,
with 16 deals in procurement. The pipeline contains three passenger
railways the Mxico-Toluca (Ps38 billion), Transpeninsular (Ps16
billion) and high-speed railway Quertaro-Ciudad de Mxico (Ps43
billion) alongside traditional highway and road projects. Mexico
arguably has the strongest pipeline of energy projects in Latin
America, including a mix of transmission, wind, and some hydro
and conventional power, 20 projects in the pipeline. Wind accounts
for the bulk of potential renewables projects in Mexico.
The outlook for gas pipeline projects is promising. Mexico has
made an expansion of its network of natural gas pipelines a priority,
as its long-awaited energy reform comes into effect. The country
hopes to unlock new investment in upstream, but until then needs to
upgrade its network to receive imported gas. Imported gas made up
3% of consumption in 2003, but 30% in 2012. Of note are is the
$1.8 billion Ramones II pipeline. Pemex eventually decided to divide
the project into two separate deals the $1.1 billion Ramones
North and the $795 million Ramones South. Alongside Ramones II,
fve other gas pipeline projects worth $2.25 billion in Chihuahua,
Durango and Sonora are expected to attract signifcant international
interest from developers and lenders.
Mining
Oil & Gas
Power
Renewables
Social & defence
Transport
Water
R
egulatory, fnancial and
environmental and social factors all
play a part in Mexican winds
sluggish growth.
Some developers, while they wait for a
new regulatory framework to emerge, have
slowed work on new projects. Gauss
Energa is among them.
In the last 20 years, the current
regulation has triggered $43 billion in
private power investment, from which $7.5
billion is related to renewable energy, says
Hctor Olea, the president and chief
executive offcer of Gauss in Mexico City.
The new energy reform to be implemented
in Mexico should not lose this momentum.
But the expected reforms may not
resolve some issues that trouble all Mexican
infrastructure developers. Mexico in general
and Oaxaca in particular has yet to
address long-standing rights-of-way
concerns. Project sites near Oaxacan ejidos,
or communal land used for agriculture by
indigenous groups, have encountered
lengthy delays to their fnancing and/or
construction. Local opponents say that
developers duped residents into agreeing
unfavourable land deals.
Developers do not always see potential
opposition as a deterrentto project
development. Of course there is always the
possibility that this could happen to me, says
one international wind developer based in
Mexico.Each development has its own
complications, but these are not viewed as
insurmountable. While the Marea project
[which faces local opposition] serves as a red
fag, people are realising it could be an isolated
incident for that property and region.
SELFSUPPLY STEPPING UP
One positive trend is the increased
willingness of large private industrial users
to serve as offtakers for wind projects.
Except for Brazil, which has somepotential
for inside-the-fence renewables development,
it is unusual for renewables developers in
Latin America to have that opportunity.
In Chile, developers and lenders have to
get comfortable with projects selling their
output on the spot market, while in Colombia,
public utilities dominate generation and
distribution. Large and creditworthy offtakers
are most popular with developers, and are the
mainstay of renewables development in Brazil.
The Comisin Federal de Electricidad
(CFE), Mexicos state-owned power
company, has been central to the evolution
of Mexicos conventional independent
power industry. It is highly rated and enjoys
a large bank following.
But the self-supply scheme has gained
momentum in Mexico. Under the scheme,
independent power producers (IPP) sell
minority stakes in projects to offtakers,
which are then deemed to be generating
their own power. In Mexico, the model has
considerable potential, given the presence
ofpower-intensive industries such as
mining,manufacturing and retail. These
industries face soaring energy prices, and
typically cross-subsidise lower tariffs for
residential users.
CFE may be the easy solution, but
people may not fully appreciate the cost
savings attainable through the self-supply
regime currently in place, says Alexandro
Padrs, counsel at Shearman & Sterling in
New York. Its only with the energy reform
that a true cultural tipping point will be
reached in the power sector. To date,
cement producer CEMEX and retailers
Grupo Bimbo and Walmart have signed self-
supply contracts.
But lenders note that there is not an
infnite supply of well-rated offtakers in
Mexico, and fnancings with lower-rated
offtakers are diffcult 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 discount
to the CFE tariff, which moves every month.
Some are structured at a fxed rate at the
outset for a project, but some are structured
around a discount to a variable price, which
creates uncertainty for lenders.
ADDING LIQUIDITY
Mexican banks have struggled to meet the
demands of renewables projects, mostly
because they lack experience with the sector
and the ability to model project cashfows.
But multilateral banks, particularly but not
exclusively the Inter-American Development
Bank and the International Finance
Corporation, appear, for now, to be flling
any gaps.
The North American Development
Bank (NADB) is also present to provide
comfort to otherwise nervous commercial
lenders, though the bank is taking smaller
and smaller tickets on each successive
fnancing that it joins. Soon these banks
that you see joining us in these deals will be
doing deals on their own, says Alex
Hinojosa, deputy managing director at the
NADB in San Antonio, Texas.
Mexicos government has repeatedly
decided against providing direct incentives
to renewables generators. The country lacks
a wholesale power market, and while
industrial users face high tariffs, only in
small corners of the country where diesel
dominates generation is wind competitive.
The future redistribution of the
energy matrix will translate into renewables
having a greater priority, which will attract
more commercial entities and lenders to
develop renewable assets, says Shearman &
Sterlings Padrs. The only thing [that]
could undercut this redistribution is an
infux of shale gas, which could redirect the
matrix back to natural gas, due to an
increased supply at inevitably lower prices.
In order to avoid that, Mexico needs clean
energy mandates and policies.
A number of ambitious fnancings for
wind assets are near market, including
projects outside Oaxaca. Oak Creek, through
its Mexican subsidiary Frontera Renovable, is
understood to be developingthe frst two
phases of its maiden 400MW Mexican wind
project, and Mxico Power Group (MPG) is
developing up to 1GW of wind capacity in
the short- to long-term.
This is an abridged version of an article
that appeared in IJGlobal magazine's
June 2014 issue
ijonline.com 8 June 2014
Resource rich,
development poor
MEXICAN RENEWABLES
By most accounts, Mexico should be a global leader in wind
development. But uncertain policy, mounting social opposition
and liquidity constraints have hampered growth.
By Rosie Fitzmaurice.
Top 10 MLAs Latin America 2013
Rank 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 America
2013
Rank 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 Pacic Infrastructure 620
ijonline.com 10 June 2014
IJGLOBAL DATA
CloseddealsinLatinAmerica2013(byvalueof investment)
Source: IJGlobal Database (ijonline.com)
Argentina
Brazil
Chile
Columbia
Mexico
Peru
Uruguay
Argentina
Brazil
Chile
Columbia
Mexico
Peru
Uruguay
CloseddealsinLatinAmerica2013(byvalueof investment)
Source: IJGlobal Database (ijonline.com)
Argentina
Brazil
Chile
Columbia
Mexico
Peru
Uruguay
Argentina
Brazil
Chile
Columbia
Mexico
Peru
Uruguay
Details of all closed
nancings and launched
projects at
ijglobal.com
Sempra US Gas & Power is nearing close on
a debt package for the 156MW Energa
Sierra Jurez 1 wind project in Baja
California, Mexico.
Among the lenders looking at the
deal are:
BBVA
MUFG
Mizuho
Nacional Financiera (Nafnsa)
North American Development Bank
SMBC
Sierra Jurez, located in La
Rumorosa, will sell its output across the
border with the US to San Diego Gas &
Electric (SDG&E), a Sempra-owned utility.
SDG&E has a 20-year power purchase
agreement with Sierra Jurez.
The project is located just south of the
US-Mexico border, about 112.7km east of San
Diego. It will connect to the existing Southwest
Powerlink at SDG&Es proposed ECO
substation in eastern San Diego county through
a new cross-border transmission line.
ijonline.com 11 June 2014
IJGLOBAL NEWS COVERAGE
Mexican state-owned oil companyPetrleos
Mexicanos (Pemex) has issued a request for
proposals for the fnancing of the north and
south components of the nearly $2 billion
second phase of the Los Ramones pipeline.
The RFP is understood to have been issued
on 14 March 2014.
Banks such as MUFG, Bancomer,
Crdit Agricole, HSBC, Mizuho, Nord/LB,
Socit Gnrale and Sumitomo Mitsui
Banking Corporation (SMBC) are among
the banks expected to respond.
According to market observers Pemex
is pushing for a tenor of between 18 and 20
years at 200bp over Libor, but banks are
hoping for nearer 250bp. They suggest
obtaining such a long tenor will be
dependent upon signifcant participation
from development fnance institutions and
export credit agencies.
Pemex is understood to have hired
both BNP Paribas and Santander as advisers
on the fnancing of both sections of the Los
Ramones II natural gas pipeline. BNP
Paribas will liaise with international lenders,
while Santander will liaise with the local and
regional development banks.
The pipeline was split into two phases,
the north and south sections,in October. The
north section, which includes 60% of the
original project (441km), is to be built and
operated by Pemex subsidiary TAG Pipelines
in association with Gasoductos de Chihuahua,
a joint venture between Pemex and Sempras
Mexico subsidiary IEnova. It will require
about $1.05 billion to develop.
GDF Suez and TAG Pipelines are
building the southern component, which
will run 287km and will require investment
of around $795 million.
Before Pemex took the decision to
split the pipeline, the project was to be
fnanced with a six-year mini-perm. Pemex
is aiming to achieve a mirrored fnancing
package for each project.
The newly launched IJGlobal will bring you more news, data and continue to break more
exclusives across the globe. The below are examples of some recent exclusive news stories
covering the Mexican market available at IJGlobal.com.
RFP out to banks for
Los Ramones II
north and south
24 March 2014
Sempra nears
Mexico wind close
24 April 2014
For more
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