Toll roads go on the block

Published: 31 October 2008

Mexico's asset privatisation lures investors

With an area of two million square kilometres and connecting north and central America, Mexico holds great promise for large infrastructure projects. Toll roads that were dead-ends for private investors during the economic crisis of 1994 are now being re-privatised and Mexican market players - construction companies, operators, banks and institutional investors - are enthusiastically pursuing these investment opportunities, often in partnership with foreign investors.

As the economy has recovered and grown, the value of Mexico's road concessions has increased and the government now views privatisation as a critical element in its infrastructure investment programme. Many of the roads are being sold at auction by the Fideicomiso de Apoyo al Rescate de Autopistas Concesionadas (FARAC), the federal government agency that nationalised them over a decade ago. Potential bidders from Mexico and overseas have shown a keen interest in acquiring these assets and investing in future expansion, new roads and infrastructure.

Mexico's transport system is almost entirely dependent on its road network, transporting 98 per cent of the people and 70 per cent of its merchandise. Of the 342,181 kilometres of roads in the country, 14 per cent are federal highways and of these, 5,933 kilometres are managed through concessions. The official Caminos y Puentes Federales (CAPUFE), which includes FARAC, controls 76 per cent of the concessions and the rest, are operated by private companies and state governments.

The country has 74 toll-funded highways, making it one of the world's largest toll-road systems. In the last 12 years, privately-held highways have shown annual traffic growth rates of 8.5 per cent to 12.8 per cent. This growth is significantly higher than the three per cent average annual growth rate of Mexico's GDP.

Open for investment
In January 2007, the Mexican government began the bidding process for a package of road concessions including four toll roads in the western-central region known as the Bajio, a high-growth region connecting the central cities of Mexico. The 599 kilometres of highways span four states and connect Mexico City with Tijuana, Nogales and Juárez, and from there to the United States and Canada. The concession would allow the winning bidder to own, operate and exploit the roads for a 30-year period.

Six consortia bid for the package and on 6 August 2007, the Secretaria de Comunicaciones y Tranportes (SCT) awarded the 30-year concession to the Red de Carreteras de Occidente consortium.

HSBC Mexico acted as joint-mandated lead arranger and bookrunner in the MXN37.1 billion syndicated loan. The loan consisted of three tranches; a seven-year loan of MXN31 billion; MXN3.1 billion as the debt service reserve facility; and MXN3 billion to finance maintenance and investments to meet the road standards outlined in the concession.

The loan is intended as a bridge into long-term financing in the local or international capital markets.

Michael Schwandt, head of HSBC Mexico Local Corporates and Infrastructure for Global Banking

Trailblazing transactions

Michael Schwandt, Head of Local Corporates and Infrastructure for Global Banking, HSBC Mexico, said this was a landmark deal for Mexico given the size and interest. "The first four bids came very close together, plus or minus five per cent," said Mr Schwandt.

The government had expected far less interest and value when it announced the sale, said Mr Schwandt. "The result underscored the appetite of international infrastructure developers and equity funds for investing in Mexico and in particular for this type of asset. They were looking to capture the underlying value supported by expectations of traffic growth and an efficient financial structure."

The auctioned-off assets for this first package were mostly brownfield, meaning that investors would not need to invest heavily in new construction. "The beauty of these assets is that they were mostly existing roads with a proven traffic history and within a fast-growing region of Mexico, reducing construction risk to a minimum with substantial upside for the new sponsors and operators," said Mr Schwandt.

Establishing a franchise in the infrastructure segment

HSBC had originally been approached by two bidding consortiums, one being the eventual winning bidder and the other a group led by Global Via, a Spanish developer and operator whom HSBC Mexico supported during the bidding process in coordination with HSBC Spain.

Once awarded, Red de Carreteras de Occidente invited HSBC Mexico to join the banking group to structure and to co-lead the financing of this transaction. "The work HSBC had done during the bidding process gave us a competitive advantage to jump in and to deliver value to the winning consortium very quickly," said Mr Schwandt.

The structuring and development of the MXN37.1 billion syndicated loan was a joined-up effort involving HSBC Global Banking, Project Finance and Global Markets teams. "The transaction was highly visible and very much made this a landmark deal for Mexico and HSBC. Plus the size of the Mexican peso facility itself was also a landmark in terms of peso funding," Mr Schwandt said.

Besides being a landmark in Mexican financing, the transaction demonstrated the range of HSBC's Global Banking and Markets' services in terms of project finance structuring, syndication, debt capital markets and derivatives, said Mr Schwandt. "Our role in FARAC 1 has strengthened our franchise as a leading, integrated finance house in Mexico and clearly positioned HSBC as a top infrastructure bank within the marketplace."

Source: HSBC

Average: 3.7

1 = Least developed and inefficient
7 = Among the best in the world

Source: Secretaria de Communicaciones y Transportes (SCT)

Source: Secretaria de Communicaciones y Transportes (SCT)