The first project bond issued to finance a port in Latin America saw investors take full construction risk with no government guarantee or financial guaranty insurance.
Peru’s Terminales Portuarios Euroandinos Paita (TPEP) raised $110 million through a Rule 144A/Reg S offering of senior secured notes due 2037 to fund the expansion of the Port of Paita in the country’s north.
The deal, which closed April 18, is a rare example of an issuer tapping the bond market to fund completion of a project.
“It shows what can be done in project bonds without a wrap,” said DLA Piper partner Gianluca Bacchiocchi who acted for the issuer and sponsors.
The notes being rated BB- by Fitch with a 8.125% fixed coupon for 25 years is also encouraging for similar issuers. “This bond opens up the possibility of doing Rule 144A/Reg S deals without an investment grade rating, and where concessionaires can get long term financing at very attractive rates,” Bacchiocchi said.
Investors’ aversion to construction risk, and the difficulty gaining waivers and amendments from many bondholders, means project bonds are normally limited to refinancing.
In TPEP’s case, construction risk was mitigated through circumstance more than structuring. The reputation of the project’s contractors and engineers, it being a brownfield rather than greenfield development, and ports being at the lesser end of the risk spectrum were considerable factors.
Typical project bond hurdles were also avoided by the notes being the standalone funding for the expansion.
The indenture was also structured to permit future series of pari passu notes, negating the need for a future intercreditor agreement. The fact the issuance contemplates all improvements needed to the port over the next 25 years make the deal somewhat unique, according to Bacchiocchi.
The TPEP issuance appears to be the next step in Peru’s evolution as a regional leader in innovative infrastructure finance methods.
This reputation started with the first use of government-issued CRPAOs (certificados de reconocimiento de pago annual de obras) in the IIRSA toll road projects, followed by the use of a project bond to refinance the Lima airport in 2007, and then the creation of RPICAOs (retribución por inversión certificados de avance de obras) for the Huascacocha and Taboada water projects over the past two years.
The TPEP deal goes beyond these achievements by including construction risk without a wrap.
Risk allocation
In addition to the reputation of project participants and the project being a brownfield port development, investors were made comfortable accepting construction risk by demonstrating the minimal repayment risk.
“Even if the construction wasn’t to occur, there was always going to be a certain amount of potential growth and there is a level of profitability at the port,” said Bacchiocchi. Traffic studies and financial models were provided with the offering documents.
The only guarantees were standard EPC (engineering, procurement and construction) guarantees required under the concession agreement. There was no political risk insurance.
Refinancing risk and balloon payments were mitigated by amortising the bonds over their term.
Fitch’s presale report also states that the project has adequate liquidity reserves to service this and future phase construction costs, and incorporates a strong provision to trap cash to pre-fund construction costs of future phases.
Security
Investors’ rights were secured by a pledge over the concessionaire’s shares, restrictions on the transfer of those shares for a stipulated period of time, and a mortgage over the concession which is stipulated by Peruvian port regulations.
Legislative primer
Ports being a regulated sector was of assistance, rather than a hindrance to TPEP. There was no difficulty obtaining regulatory approvals, and the operator has prior of knowledge of other port developments in the vicinity which could create competition.
DLA Piper and Estudio Rodrigo Elías & Medrano were international and local counsel, respectively, to the issuer and sponsors. Clifford Chance and Estudio Hernandez served the same roles for underwriter Goldman Sachs. Indenture trustee Citi was advised by SNR Denton and Rubio Leguia Normand.
See also
Odebrecht Oil & Gas’s $1.5 billion issuance dealt with construction risk http://www.iflr.com/Article/2744881/Search/Results/Project-bonds-not-limited-to-refinancings.html?PageId=201716&Keywords=project+bond&OrderType=0
Project bonds set to dominate http://www.iflr.com/Article/2798619/Search/Results/Project-bonds-set-to-dominate.html?PageId=201716&Keywords=project+bond&OrderType=0