Limited recourse debt financing of infrastructure projects in Latin America will enter a ‘new paradigm’ in 2009 characterised by expanded club deals and a greater role for multilateral and export credit agencies (ECAs), project finance lawyers at Shearman & Sterling advised clients in a memorandum published this week.
In the old paradigm, banks would offer to fully underwrite debt on very friendly debt margins, covenants and tenors. But the progressively contracting credit markets in 2008 prompted structures such as expanded clubs, in which debt obligations are spread across a larger number of banks that pool their lending strength, to become more prevalent.
It's not an era when you can go to one of the big banks and say, 'I have a big deal' and get five different proposals from five different banks.
Cynthia Urda Kassis
“It’s not an era when you can go to one of the big banks and say, ‘I have a big deal’ and get five different proposals from five different banks,” said Cynthia Urda Kassis, a partner in the Latin American Project Development & Finance practice at Shearman, who co-authored the memorandum.
“Now, with liquidity constraining, a number of banks exiting the sector and being judicious about how they allocate credit it is very difficult to find a bank that will underwrite a transaction fully,” she added.
As a result, Kassis believes that Latin American infrastructure deals in 2009 are likely to continue to be financed in a club fashion. She points to the GNL Quintero consortium’s $1.1 billion financing of a liquefied natural gas terminal in Quintero bay in Chile as an example of a deal structure that is likely to become more common. That transaction included a nine-member club structure.
Infrastructure borrowers in developed markets are facing a similar trend and are responding in part by putting more equity into their investments in the near term in hopes of refinancing later on. In the Latin American markets, multilateral and ECAs have stepped in to provide debt as commercial banks have decreased their lending or pulled out of the region.
Multilateral agencies, such as the Inter-American Development Bank (IADB), provide project financing as part of a broader development mission for a given region while ECAs provide financing to promote trade with their respective countries.
Most recently, in the Panama Canal Expansion Program financing, five multilaterals and ECAs, the International Finance Corporation, Corporación Andina de Fomento, the IADB, the European Investment Bank and the Japan Bank for International Cooperation, provided funding.
“[Multilaterals and ECAs] are less susceptible to the current financial crisis; part of their mandate is to be there in a crisis,” Kassis said. “They don’t have the same kind of market issues that are affecting the private banks but they do have overall budgets for specific countries, so given the overall focus on them, there is now a lot of competition for the dollars that they have,” she added.
Multilateral and ECA financing tends to take longer to secure due to the prolonged due diligence and approval process that many of the lending organisations will typically undertake before they commit capital. But having a multilateral or ECA as a participant can lend credibility to a project in the eyes of a local government, which can be an implicit form of political risk insurance.
Kassis expects multilaterals and ECAs to continue to play a major role in Latin America in 2009 but warns that their resurgence may seem like déjà vu to the early 1990s, when they were much more active than commercial banks in providing project finance.