The role of political risk insurance (PRI) in Latin American project financings faces a dubious future as policy writers employ stricter underwriting criteria and risks not typically covered by PRI emerge.
PRI for Venezuelan and Argentinean projects has been out of the question for some time. But there’s been a trickledown effect to its neighbours.
“Not as many political risk insurance policies are being written now for Latin America,” said Shearman & Sterling partner Jeanne Olivier.
“The few that we have seen recently are MIGA [the World Bank’s Multilateral Investment Guarantee Agency] and export credit agency policies insuring the equity in particular deals in central America and the Caribbean, but we have not recently seen banks buying lender policies in Latin America,” she added.
While some sponsors have obtained coverage through these limited means, banks – if anything – have bought comprehensive policies. And both are paying greater attention to the fine print.
“These policies are being bought selectively, with greater focus on language – what is and what isn’t covered,” Olivier said.
The changes are, to a large extent, the legacy of the Argentinean debt crisis a decade ago. But the eurozone crisis and Arab Spring are popular reminders of possible project threats. Concerns about the election of President Humala in Peru (which proved unfounded) and the Argentinean government’s nationalisation of Repsol’s subsidiary YPF are more local and recent reminders.
These events have led to a greater overall awareness among companies of how political risk may play out and how to manage it, according to Geert Aalbers, director of corporate investigations Latin America at risk consultancy Control Risks.
He has seen a dramatic increase in demand for political risk assessment over the past year. He’s also seen increasing types of risks not covered by PRI.
The high impact and highly publiciced risks like expropriation and politically motivated violence are not the main threats. Instead, sponsors and lenders must consider the possibilities of governments’ selective enforcements, creeping nationalisation through demands for joint ventures with quasi-government entities, deferred execution of judicial sentences, or labour unions fueling indigenous groups.
“All these subtle policy changes and influences are typically not covered by PRI and come from local areas of government,” Aalbers said.
Risks are becoming more local and more granular and parties need to rely less on signing risk away through ‘magic bullets’ like PRI and financial guarantees, he said. These risks must be factored into deals as part of the initial investment decision and preventative steps taken through more stringent internal risk management procedures.
In some ways, PRI becoming less prevalent reflects there being less risk and greater predictability for deals in the region.
"The historical role and use of PRI in LatAm has changed as more LatAm countries achieve investment grade ratings," Olivier said.