Latin Infrastructure Quarterly Issue 4


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Latin Infrastructure Quarterly Issue 4

  1. 1. XXXXXX XXXXX LatinLatin Infrastructure Quarterly 1 Infrastructure Quarterly The Project Bond Evolution: Port of Paita Case StudyGianluca G. BacchiocchiThe Canadian WayHealth PPPs Uruguay: Pension Funds and Infrastructure
  2. 2. 2 Latin Infrastructure Quarterly XXXXXX XXXXX
  3. 3. Latin Infrastructure Quarterly 3 ContributorsTo Our Readers:A Azpiroz, Ignacio Unión Capital s always I am very excited with what you will find inside and I want to make public how much I appreciate the support from the practitioners Bacchiocchi, Gianluca G. that made this Issue possible. Given that large number of articles inside I DLA Piper will not offer brief descriptions of each of them. What I do want to com- Barrios, Adriánment on is that, keeping in line with the previous issues of LIQ, this Issue brings you PwCcoverage of: current matters such as project bonds; new and evolving ones such asinfrastructure investment funds; profiles of companies and projects such as Terminal Bentivegna, EnricoInternacional del Sur (Peru), among other really interesting topics. Pinheiro Neto Advogados LIQ has partnered with Latin Markets to provide relevant exposure to the up- Celio, Jorgecoming “Peru Capital Projects & Infrastructure Summit” and has interviewed three IOS Partnersof the speakers that will be sharing their knowledge and experience at said Summit:Michelle Haigh of Conduit Capital Partners; José Quiñones of the Oficina de Nor- da Rita, Paulmalización Previsional; and Erick Hein Dupont of Terminal Internacional del Sur. PwCI am very happy with the outcome of these interviews and I hope you find them Del Vento, Maximilianointeresting. Partners Group On a last note, please do not close this Issue without reading “Rawson WindProject: A landmark in the Argentine Renewable Energy Generation Market”. This Garver, Mathewarticle should be the first of a series of articles covering infrastructure development Patton Boggs LLPand finance in forgotten Argentina. As I write these paragraphs I am on a plane re- Gutiérrez, Luisturning from delivering a presentation titled “Unveiling the Successes and Critical EMBARQ Latin AmericaConsiderations for LatAm Companies in the Brazilian Infrastructure Market” at theMarcus Evans’ Brazilian Infrastructure and Property Development Summit that took Haigh, Michelleplace close to Salvador (Bahia). The context of delivering said presentation that ob- Conduit Capital Partnersviously touched on Corporación América and being on a plane made me think about Hein Dupont, Erickthe highly successful tender of four Brazilian airports that showed the world how Terminal Internacional del Surinterested investors and operators worldwide are in Brazilian infrastructure. Afterconnecting in São Paulo, I will arrive in Argentina, one of the most hostile jurisdic- Jauhari, Anaditions in Latin America for private capital and resources in the business of developing Emerging Energy and Environment Groupand financing infrastructure. Llamosas, Cecilia The difference between Brazil and Argentina when it comes to current infrastruc- Vouga & Olmedo Abogadosture policy, investment and development is great. As an Argentine national and anobserver of how the region develops its economic and social infrastructure it deeply Motta, Carlos Eduardosaddens me (but does not surprise me) when international and regional players talk Admiral, Lawyer and Engineerto me about how they do not even consider Argentina as a possible market in which Nascimento, Joãoto allocate their capital and resources. Hopefully this scenario will change in the Pinheiro Neto Advogadosfuture and the articles featured in LIQ will serve the purpose of introducing the Ar-gentine infrastructure market to international players. Queiroz, Cesar Please do not hesitate to contact me at with feedback on International Consultantthis Issue, questions, issues you would like to read about, events you want to pro- Quiñones, Josémote, and practitioners, companies or projects you would like see covered. Oficina de Normalización Previsional (Perú)Best regards, Rodriguez, Victor Hugo The Hedge Fund Association – LatAm Chapter Russo, Ricardo Pinheiro Neto AdvogadosPatricio Abal. Sawant, Rajeev Assistant Professor at Baruch College Vazquez Acuña, Martín Marval, O’Farrell & Mairal Vouga, Rodolfo Vouga & Olmedo Abogados
  4. 4. 4 Latin Infrastructure Quarterly LatAm Chapter XXXXXX XXXXX Connect | Unite | Inspire Advancing Transparency and Trust in LatAm Alternative InvestmentsThe Hedge Fund Association™ is a not-for-profitinternational group of industry professionals with a missionto provide a forum for thought leaders, innovators,practitioners and investors who are shaping the way businessis conducted in the global hedge fund industry.With the maturity and institutionalization of the global hedgefund industry, the HFA advocates for the industry by givingvoice to the issues affecting the industry through theeducation of investors, the media, regulators and legislators.Members of the HFA also serve the community at largethrough a commitment to philanthropy.. Latin American Chapter Director Victor Hugo Rodriguez, LatAm Alternatives New York-LatAm Chapter Director Les Baquiran, Park Hill Group (a division of the Blackstone Group) Brazilian Chapter Co-Directors JOIN US AT HFA LatAm Marcia Rothschild, Citibank Latin America MEMBER BENEFITS: Otavio Vieira, Fides Asset Management Chilean Chapter Director  Exclusive Opportunity to be interviewed at Juan Luis Rivera, Moneda Asset Management Top Publications  Unique Private Events with Asset Colombian Chapter Director Allocators (Exclusive to Managers Daniel Osorio, Andean Capital Management Members)  Your Logo and Core Strategies Argentinean and Uruguay Chapter Co – Directors Description on HFA Web Site Michelle Furnari, LatAm Alternatives  Authorization to display HFA Logo in your Martin Litwak, Litwak and Partners firm literature  Private Invitations & Industry Conference Peruvian Chapter Director Discounts Carlos Rojas, Andino Capital Management  Access a network of leaders for Panama Chapter Director expanding professional opportunities Jose Abbo, SFC Investments  Introductory Annual Membership Pricing The Hedge Fund Association™ (U.S.) 1-202-478-2000 | |
  5. 5. Contents 5 ContentsLocal Pension Funds and Infrastructure Development in Uruguay......................6The Project Bond Evolution: Port of Paita Case Study.......................................13Brazilian Fostering of Private Financing of Infrastructure Projects...................18Peru: Port of Matarani - Terminal Internacional del Sur....................................22Peru’s National System of Pensions...................................................................27The Canadian PPP Model and Its Applicability in Latin America.....................29Health PPPs: Rationale & Drivers......................................................................32Integrated Transit Systems and Bus Rapid Transit in Latin America................36Infrastructure Investing – An Alternative Perspective.......................................40Divergence in Foreign Direct Investment and Infrastructure Development inLatin America....................................................................................................45III Brazil Infrastructure Investments Forum......................................................49The Peruvian Electricity Market.......................................................................51Energisation of Paraguay’s Eastern Region.......................................................53LatAm Infrastructure: Outlook for 2012 and the role of PPPs..........................55Critical Steps for Implementing Successful Public-Private Partnerships in theBrazilian Road Sector.........................................................................................58Rawson Wind Project: A Landmark in the Argentine Renewable Energy Gen- Adrian Barrioseration Market....................................................................................................63Latin American Hedge Funds..............................................................................66 Paul da Rita
  6. 6. 6 Latin Infrastructure Quarterly Infrastructure FinancingLocal PensionFunds andInfrastructureDevelopment inUruguayLIQ talks to Ignacio Azpiroz of Union Capital andMaxmiliano del Vento of Partners GroupI gnacio Azpiroz: Last year a new With approximately EUR 24.8 billion in ture opportunities: brownfield (existing), PPP law was approved unanimous- assets under management across private rehabilitative brownfield, and greenfield ly and the recent steps towards its equity, private infrastructure, private real (development), across geographic re- implementation represent an ap- estate, and private debt, the firm has re- gions and accessed through direct, sec-propriate legal framework to promote mained as an independent company, al- ondary and primary investments. As athe participation of local investing insti- lowing it to focus exclusively on private result, Partners Group began to establishtutions in future projects. Access to the markets assets and minimizing potential the team, tools, systems and geographicasset class had been quite limited until conflicts of interests. Partners Group has presence necessary to address this broadnow, but given the new regulation, I en- been an early player in the infrastructure set of opportunities. Since then, Partnersvision a substantial shift in the following sector, making its first investment in 2001 Group has built up its expertise, relation-months. In Uruguay, there is consensus and its first private infrastructure fund ship and knowledge base in global infra-among economists that, in order to main- investment in 2002. As the infrastructure structure markets, by investing over EURtain economic growth in the long run, the market matured, Partners Group devel- 1.3 billion and completing 52 transactionsinvestment/GDP ratio must increase. As oped significant infrastructure expertise in more than ten countries in the course oflong as the PPP projects are adequately through a number of investments in in- the past decade.structured I am convinced that pension frastructure partnerships, direct and sec- How was the portfolio of the local pen-funds will support these initiatives. ondary investments. These investments sion funds, AFAPs, made up before the Maximiliano Del Vento: Partners have been broadly diversified across geo- recent changes to the legal framework?Group was founded in Switzerland in graphic region and sector (e.g. transporta- Can you describe these changes in theJanuary of 1996 and has seen then steadi- tion, communication, utilities and social framework? And, how do you envisionly increased its presence to a global or- infrastructure). Early on, Partners Group the portfolio to change in the near future?ganization that includes over 550 profes- recognized the importance of making use Ignacio Azpiroz: Current portfolio op-sionals in 15 offices around the world. of the full spectrum of private infrastruc- portunities are reduced, not because of lit-
  7. 7. Infrastructure Financing Latin Infrastructure Quarterly 7 “Montevideo’s Internationaltle interest from AFAP but because thereare few projects available in the market.Considering both direct and indirectinvestment in infrastructure, AFAP’sparticipation today is about 5% of the Airport is now a new landmarkportfolio. Montevideo’s InternationalAirport is now a new landmark for thecountry and we are proud to have partici- for the country and we arepated in this project. With regards to therecent changes to the legal framework, proud to have participated in this project.”there are two main points from the lend-ers point of view: the concession pledgeand the step in right implementation. Inaddition the pension fund limits regard- Ignacio Azpirozing PPP investments was increased from25% to 50%. I envision 10% to 15% par- tion. In our experience, pension funds are GDP ratios of about 5% and high demandticipations in the asset class. The system increasingly looking at infrastructure to of sovereign debt endorse this statement.currently holds 9 billion AUM which diversify their portfolios, due to the low I am sure that securities related to infra-represents 17% of GDP and, if we take correlation to traditional asset classes. In structure investments will have also highinto account that it is still in the accumu- summary, the asset-class is attractive for demand if investors can custody them atlation phase, these are big numbers for pension funds because infrastructure as- an external clearinghouse.the size of the country. sets typically: i- show low correlation to Maximiliano Del Vento: The OECD broader economic cycles, providing a key report on Infrastructure to 2030 (volumesWhy do infrastructure investments diversification benefit to pension fund 1 and 2) published in 2006/2007, esti-make sense for local pension funds? portfolios heavily exposed to equities and mated global infrastructure requirements bonds; ii- provide a stable predictable to 2030 to be USD 50 trillion. SuchIgnacio Azpiroz: I believe that this type return with strong downside protection; levels of investment cannot be financedof assets is intrinsically related to the iii- generate a running cash yield provid- by traditional sources of public financeportfolio’s objectives. These are long- ing capacity to fund pension obligations; alone. The result has been a significantrun investments with a very attractive iv- trade at compelling risk premiums infrastructure gap and the need of r newrisk/return relation. In addition, there are over government bonds; and v- provide sources of finance. Public budgets fed byseveral other positive aspects, including: inflation protection due to inflation-linked taxes will not suffice to bridge the infra-a) diversify our portfolio; b) cash flows (or at least inflation correlated) payment structure gap. What is required is greaterare indexed to inflation; c) improves the structures. private capital participation, together withquality of life of our affiliates. It is im- greater diversification of public sector rev-portant to point out that this kind of in- When it comes to infrastructure invest- enue sources. Institutional investors willvestments in infrastructure are also part ments, do AFAPs invest/work together? play a relevant role in bridging this gap,of other pension fund portfolios of the financing long-term, productive activi-region, such as in Chile, Perú, Colombia Ignacio Azpiroz: This is an important is- ties that support sustainable GDP growthand México. sue. At Union Capital we believe that any and increased national competitiveness. Maximiliano Del Vento: The continu- improvements regarding the development Partners Group believes that emerginging volatile macro-economic backdrop of the final security will benefit all inter- markets exposure can be an important re-and record low real yields for safe assets ested parties. All key actors (developers, turn driver when incorporated into glob-have resulted in growing interest by in- sponsors, funders and government agen- ally diversified infrastructure portfolios.stitutional investors in an asset classes cies) should look for synergies in order to As a result, all of Partners Group’s infra-that can generate stable performance achieve goals, gain experience and move structure programs have an allocation towhilst still producing desirable yields. forward in a synchronize way. emerging markets infrastructure assetsInfrastructure investments are attractive Are there opportunities for internation- (typically 5% - 20%). In addition Part-to institutional investors such as pension al institutional investors? Has there been ners Group manages a separate accountfunds as they can assist with liability interest shown by big international play- for a European pension funds focuseddriven investments and provide dura- ers in the Uruguayan market? solely on emerging markets infrastruc-tion hedging. Infrastructure projects are Ignacio Azpiroz: Yes, I believe new ture investments. Despite a recent slow-long term investments that could match conditions clearly favor the participa- down in the growth trajectory of severalthe long duration of pension liabilities. tion of international investors. It is clear key economies, many emerging marketIn addition infrastructure assets linked the Uruguayan prestige abroad based in countries still exhibit strong growth fun-to inflation could hedge pension funds a market friendly legal framework and damentals, are in a healthy fiscal position,liability sensibility to increasing infla- a strong macroeconomic outlook. FDI/ and have a high need for infrastructure
  8. 8. 8 Latin Infrastructure Quarterly Infrastructure Financingbuild-out as well as the ability to investin infrastructure assets. Emerging market “In our experience, pension funds aregovernments have increasingly adoptedstable regulatory frameworks, a prerequi- increasingly looking at infrastructure to diversify their portfolios, due to the lowsite for attracting long-term capital. Con-sequently, country and regulatory risks in correlation to traditional asset classes.”many jurisdictions have declined, therebyincreasing the set of investment opportu-nities in emerging markets. For instance,this can be seen in Thailand, where the Maximiliano Del Ventofirst independent power producer regu-lation was established in 1992. Today, the renewables space but have sensibly the asset class is important due to thea 15- year plan is driving investments structured such subsidies to make them independent and significantly uncorre-in the renewable energy sector. Partners fiscally acceptable longer-term (thereby lated nature of the risks to which privateGroup recently completed an investment reducing the risk of retrospective changes infrastructure assets are exposed ( Wind Energy Holdings, the company as we have seen in Europe). Outside the political risk, regulatory risk, projectconstructing Thailand’s first utility-scale renewables sector we also believe that risk and potentially some demand risk).wind projects. These projects benefit transportation and energy infrastructure Pension funds should also appreciatefrom a highly attractive ten-year adder assets remain attractive in the emerging that there is not a “one size fits all” ap-tariff and considerable downside protec- markets, particularly in Asia. proach to how best to access this oppor-tion through conservative underwriting tunity. Partners Group approaches theassumptions. Partners Group continues to How should pension funds access the infrastructure investment opportunitybelieve that the most compelling opportu- infrastructure investment opportu- through an integrated approach of in-nities in emerging markets involve asset- nity? vesting in infrastructure funds (on bothcreation strategies (i.e. greenfield) rather a primary and a secondary basis) as wellthan buying existing assets (i.e. brown- Maximiliano Del Vento: Pension funds as directly into infrastructure projects/field), which tend to be priced at a premi- that wish to access the investment op- assets. Investing in this manner allowsum. We are seeing particularly attractive portunity should prioritize building a the firm to take maximum advantage ofdeal-flow in the renewable energy sec- diversified portfolio of quality infra- market opportunities for the benefit oftor in Asia (in particular Thailand, India structure assets. Partners Group be- its clients. In this way Partners Groupand Malaysia), Latin America, Eastern lieves it is important to diversify private also can construct portfolios that moreEurope and South Africa. Many of these infrastructure investments by region, effectively mitigate the J-curve, pro-geographies have established attractive sector, and maturity stage (greenfield/ vide earlier distributions and enhancedfeed-in tariffs to promote development in brownfield). Such diversification within liquidity.
  9. 9. Infrastructure Financing Latin Infrastructure Quarterly 9
  10. 10. 10 Latin Infrastructure Quarterly Deals Partners Group strategically allocatescapital to the segments of the private in- Ignacio Azpiroz, Chief Invest-frastructure market that the firm believes ment officer, Union Capital AFAPwill offer superior value “relative” to (Pension Fund – Uruguay)other segments at a given point in timewithin strategic asset allocation ranges. Ignacio Azpiroz is the Chief Invest-Partners Group considers this integrated, ment officer of Unión Capital AFAP,relative value approach to be the founda- one of the four pension funds in Uru-tion for superior long-term investment guay with USD 1.450 million of assetperformance. under management as of September, 2011. He has more than 15 years ofWhat have been major works financed experience in the market. He has alsoin the past by AFAP? And, what are the advised Boston Fondos mutual fundsprojects in the pipeline? from 1999 to 2001. He is an econo- mist from the Udelar University, andIgnacio Azpiroz: I have already men- holds a Finance Diploma from ORTtioned the construction of Montevideo’s University. Besides he is a CFA char-International Airport that involved a total terholder since 2007.investment of over $ 200 million. Someother major projects funded by AFAP inthe past include the improvement of na- Maximiliano Del Vento, Investment Solutions, Partners Grouptional highways, energy production proj-ects and the development of sanitation Maximiliano Del Vento is a member ofsystems. These projects were developed the investment solutions team in theby national and local governments. Re- New York office. His responsibilitiesgarding the pipeline, the first two projects include investment origination and cli-are a Greenfield of a correctional institu- ent relations in Latin America. Prior totion and a Brownfield of roads. We also joining Partners Group, he worked atforesee some other investments in rail- Merrill Lynch in New York, covering pri-roads, ports development, and wind ener- vate clients and middle market institu-gy which will demand investments close tions in Latin America. Previously, heto $ 5 billion in the next 5 years. was an associate at Bank of America Merrill Lynch global investment bank inWhat is the role of the Uruguayan Cen- New York, covering financial sponsorstral Bank in AFAP investments? in North America. He holds a Master’s degree in corporate finance from theIgnacio Azpiroz: The Uruguayan Central University of Barcelona in Spain, anBank (UCB) regulates the entire system. LL.M. in Law and Economics from theThe availability of this type of invest- University of Torcuato Di Tella in Argen-ment projects is based on three minimum tina, a juris doctor degree (J.D. equiva-requirements: 1) the UCB must approve lent with honors) from the University ofthe investment; 2) the instruments must Belgrano, Argentina and earned a Financial Risk Management Certificatebe listed on an exchange; and 3) obtain from New York University.a local rating of at least BBB-. The mainchallenge now is to obtain a good ratingduring the pre-operational phase withsome credit enhancement that can ensurethe participation of pension funds from investment, both locally and internation- are adapting their regulations to addressthe start. One important issue is that the ally. PPP projects are not only a great op- infrastructure needs, putting local pensionAFAP cannot bear construction risk. I portunity for portfolio diversification but funds and other institutional investors inthink that a mechanism to minimize this will also help improved competitiveness a leadership position to champion the de-risk must be developed. as well as quality of life for our affiliates. velopment of asset class. Failure to make Ignacio Azpiroz: In sum, I am con- Maximiliano Del Vento: The suc- significant progress towards bridging thevinced that the economic environment cessful expansion of pension funds into infrastructure gap could prove costly inas well as the adequate legal framework infrastructures depends to a large extent terms of slower economic growth andwill promote the success of PPP projects. on regulatory changes to pension fund re- loss of international competitiveness.I expect a high interest in this type of gimes. Several countries around the world
  11. 11. Latin Infrastructure Quarterly 11
  12. 12. 12 Latin Infrastructure Quarterly DealsInfrastructure financing in Latin America has developedrapidly over the last 6 years. What was generally limitedto syndicated bank and multi- and bilateral lending, gov-ernment funding and insured project bonds, infrastruc-ture financing has evolved to rely on the capital markets The Project Bondlike never before, even without the support of traditionalcredit enhancers. In the past, especially before the 2008market meltdown, when the capital markets were accessedto finance Greenfield and Brownfield projects, interna-tionally placed bonds were either wrapped by credit en- Port of Paitahancers, or involved the securitization of payments com- Evolution: Case Studying from a central government that were not tied to thecompletion of the project or operating risk. Only once theproject was completed could a project bond that relied onthe cash flows of the particular project be issued withoutcredit enhancement in the capital markets. In the lattercase, the original debt that was incurred for the construc-tion of the project was refinanced with bonds that a pro-vided longer tenor with fixed interest rates (if US dollarbased) and perhaps even lower interest rates.J ust recently, however, on April 18, coastal port in the northern region of Peru 2012, the first Rule 144A/Reg S in terms of container volume. Its opera- project bond was issued for a Latin tions are carried out pursuant to a 30‑year American Brownfield project be- design, build, finance, operate and transferfore construction and without credit en- concession granted by the Governmenthancement. This landmark project bond of Peru (the “Concession”) in Septemberwas issued by Terminales Portuarios Eu- 2009. The Issuer derives its revenues fromroandinos Paita S.A. (the “Issuer”) for tariffs charged for the provision of cer-the expansion of the Paita Terminal Port tain standard services to users of the Portin the region of Piura, Peru (the “Port”). which are required under the Concession,The notes (the “Notes”), which are due in including, among others, the loading and2037, raised $110,025,000, carry a fixed unloading of cargo, cargo movement andinterest rate of 8.125%, and were rated weighing, and from fees charged for the by Gianluca G. Bacchiocchi, Esq.“BB-” by Fitch and “BB” by Standard & provision of any special services to usersPoor’s. This article provides an overview of the Port not required under the Conces-of the transaction, and explores some of sion, including, among others, stevedor-the key structuring issues that had to be ing, reefers, shiftings and late arrivals.overcome in order to complete the first The Issuer is 50% owned by Cosmossuccessful Rule 144A/Reg S project bond Agencia Marítima S.A.C. (“Cosmos”), awith full demand, operating and construc- subsidiary of Andino Investment Hold-tion risk for a Latin American project. ing S.A. (“AIH”), 40% owned by Tertir – Terminais de Portugal S.A. (“Tertir”),The Issuer a subsidiary of Mota-Engil, SPGS, S.A. (“Mota-Engil”), and 10% owned by Mo-The Issuer operates, maintains and devel- ta-Engil Peru S.A., a subsidiary of Mota-ops the Port, which is the second largest Engil and formerly known as Transleicoastal port in Peru based on twenty-foot S.A. (“Mota-Engil Peru” and togetherequivalent units (“TEUs”), and the largest with Cosmos and Tertir, the “Sponsors”).
  13. 13. Deals Latin Infrastructure Quarterly 13The Port to cover the debt service on the notes ac- proximately $123,000,000 (“Stage 4”) is cording to their model, and because the at the Issuer’s discretion for the operationThe Port was built in 1966 and reno- bulk of the IMAG was only available for of the Port, but must be completed ac-vated in 1999. The Port was managed a period of 15 years, beginning one year cording to the following schedule: by theby Empresa Nacional de Puertos, S.A. after the completion of Stage 1 (described 5th year of the Concession $5,000,000 of(“ENAPU”), an entity owned and con- below), whereas the Notes would be out- Works are to be completed, by the 10thtrolled by the Government of Peru, from standing for approximately 7 additional year an additional $10,000,000 of Worksits construction until October 7, 2009, years. One final consideration regarding are to be completed, by the 15th year anwhen the Issuer took over operations in the IMAG for this transaction was rele- additional $10,000,000 of Works are toaccordance with the Concession. The vant: it is paid 12 to 13 months after the be completed and by the 20th year the re-Port’s operations are focused on exports, fiscal year in which a shortfall determina- mainder of the additional Works are to bewhich represented approximately 71% of tion has been made, and not on a month- completed. The Concession requires theits total activity in 2011, 99% of which by-month basis, meaning that it does not Issuer to set aside and transfer to a specialconsisted of container shipments. The cover demand volatility during a year, but trust (the “Additional Investments Trust”)main exports shipped through the Port rather such volatility had to be mitigated each year, for the first 20 years of theare fish, fishmeal, fish oil, mangos, coffee by a debt service reserve. Concession, amounts required to com-and bananas. The main imports shipped The Concession may be terminated plete the Stage 4 Works according to athrough the Port are solid bulk products, prior to its original expiration date for the schedule that ensures that adequate fundssuch as fertilizers and grains, and liquids, following reasons, among others: (a) mu- will be available to complete these Workssuch as soy oil. tual agreement of the parties, (b) unilater- in accordance with the above timing. ally by the Grantor for reasons related to As compensation for the Concession,The Concession public interest, (c) by the non-breaching the Issuer is required to pay two fees on party upon a breach of the other party’s a monthly basis. The first fee is paid toPursuant to the Concession, the Issuer material obligations, or (d) at the Issuer’s the Grantor, and is equal to 2% of the nethas the right to operate and maintain the option in case of force majeure or acts of monthly income of the Issuer from pro-Port’s existing facilities and is required to God that affect the completion of the Is- viding standard and special services atdesign, construct, operate and maintain suer’s contractual obligations under the the Port. The second fee is paid to thea new container pier and, depending on Concession for a period of 6 months and regulator of the Port, the Peruvian Pub-the level of utilization of the Port, make produce losses of over 60% of the Port’s lic Transport Infrastructure Regulatorycertain other improvements, including the operational capacity. Agency (Organismo Supervisor de la In-installation of additional port equipment The Issuer is required to invest ap- versión en Infraestructura del Transporteand reinforcement of the existing jetty proximately $293 million in the Port (the de Uso Público) (the “Regulator”), whichpier. The Issuer is also required to pro- “Works”) in four stages, so long as cer- is currently equal to 1% of net annual in-vide the standard services, but is entitled tain demand levels are reached at the Port. come received from standard and specialto collect fees for any other services that Stage 1 of the Works, with an estimated services at the Port. In addition, the Is-are provided to users of the Port. total cost of $130 million, is required to suer must make a contribution every year Pursuant to the Concession, the Min- begin immediately and consists of the to the Port of Paita Social Fund in theistry of Transport and Communications construction of a new terminal, which amount of U.S.$195,858, which funds areof the Republic of Peru (Ministerio de will have a 300 meter berth and 13 me- intended to promote sustainable develop-Transportes y Comunicaciones de la ter depth and a container yard of 12 hect- ment in the Paita Province.República del Perú) (the “Grantor”) pro- ares, and the installation of three gantryvides the Issuer with a minimum annual cranes at the Port (“Stage 1”). Stage 2 Construction and Equipmentincome guarantee (“IMAG”) pursuant to of the Works is required to be completed Workswhich the Grantor will pay the Issuer the within 18 months of the Port achievingshortfall between the revenues collected container volume of 180,000 TEUs per All the construction Works that are in-by the Issuer for a particular calendar year, and involves the purchase of addi- tended to be completed with the pro-year and the minimum annual guaran- tional port equipment with an estimated ceeds of the financing (the “Construc-teed income for that year (which amount cost of approximately $19.3 million tion Works”) include the constructionincreases each year that it is available). (“Stage 2”). Stage 3 of the Works is re- for the Stage 1 Works and certain StageAn IMAG can be an important consid- quired to be completed within 18 months 4 Works. These Construction Works areeration for a financing, especially if it is of the Port achieving container volume of to be completed by Mota-Engil Peru,sized to cover debt service during the life 300,000 TEUs per year, and involves the with the support of Mota-Engil, Engen-of the debt service and is paid quickly reinforcement of the existing jetty pier, its haria e Construção S.A. (collectively, theonce a shortfall determination has been support area and the purchase of addition- “Contractors”), pursuant to a fixed pricemade. However, in this transaction it al port equipment, with an estimated cost engineering, procurement and construc-was not given any consideration by the of approximately $19.8 million (“Stage tion services contract (the “EPC Con-rating agencies because it was not sized 3”). The remaining investment of ap- tract”). The Contractors, pursuant to the
  14. 14. 14 Latin Infrastructure Quarterly DealsEPC Contract, are required to provide a In addition, the Issuer entered into tors, holding the bonds without gettingperformance guaranty in an amount equal a contract (the “Independent Engineer involved in decision-making, unless fac-to 10% of the total compensation to be Agreement”) with R. Rios J. Ingenieros ing a significant change or an event of de-paid under the EPC Contract and a qual- (the “Independent Engineer”), which is fault. In this transaction, not all approvality guarantee in an amount equal to 1.5% acting as the independent engineer on rights were given to the Independentof the total compensation to be paid un- behalf of the bondholders, and with Ci- Engineer, which is normal for a projectder the EPC Contract. Other than these tibank, N.A., as bondholder trustee (the bond. In those situations where the Inde-guarantees provided by the Contractors, “Indenture Trustee”), pursuant to which pendent Engineer was not given approvalno other guarantees are provided to the the Independent Engineer provides, for rights and the bondholders are requiredIssuer for the Construction Works. the benefit of the Indenture Trustee on to approve certain actions (other than an The equipment Works that are to be behalf of the bondholders, all services event of default scenario), the bondhold-completed with the proceeds of the fi- contemplated to be performed by the ers will be deemed to have approved suchnancing (the “Equipment Works”) include Independent Engineer under the various actions unless a certain percentage (usu-all of the cranes required for the Stage 1 transaction documents. These services ally a majority) of the bondholders haveWorks and two additional mobile cranes include, among others, reviewing and au- responded within a set amount of timethat qualify as Stage 4 Works. The Equip- thorizing payments for the Construction after receiving the applicable approvalment Works will be completed under two Works and Equipment Works and moni- request notice, disapproving of the ac-separate sale and installation contracts. toring the progress of construction under tion. This deemed approval approachThe Stage 1 Equipment Works will be the EPC Contract, and the installation and prevents bondholders who fail to respondcompleted by Liebherr Container Cranes assembly of the cranes. In addition, the to an approval request from keeping theLtd. and the Stage 4 Equipment Works will Independent Engineer was requested to Issuer from going forward with necessarybe completed by Liebherr Werk Nenzing prepare an independent engineer’s report, changes, even though these bondholdersGMBH. Both supply contracts require the that was attached to the offering circular would have agreed with the request ifsuppliers to provide the Issuer with letters for the Notes. they had responded. The assumption isof credit to support the completion of their Because the financing is pursuant to a that only bondholders that disagree withobligations under the supply contracts and project bond, rather than a traditional loan a certain action will be motivated enoughto support the advance payments required transaction, the Independent Engineer to respond to an approval request. In anto be made by the Issuer under them. will also be required to re-test the Issuer’s event of default scenario, the bondholders debt service coverage ratio upon the oc- will be required to give actual instructionsSupervision of the Works currence of certain events and provide to the Indenture Trustee. approvals or disapprovals with respectThe Issuer entered into a construction to certain actions of the Issuer under the The Notesand equipment installation supervision transaction documents, such as changescontract (the “Construction Supervision to budgets, the Issuer’s three-year capi- The Notes, which are senior secured obli-Contract”) with Bureau Veritas del Peru tal plan and the implementation of any gations of the Issuer, were issued pursuantS.A. (the “Supervisor”) to supervise the major Works. These additional actions to a New York law-governed indentureconstruction of the Construction Works are significant in a project bond, since and indenture supplement (collectively,and the installation of the cranes, and to the Issuer will not know the identity of the “Indenture”). The Notes carry a fixedcoordinate these Works to ensure timely the bondholders to discuss these actions interest rate of 8.125% throughout the lifecompletion of the Issuer’s obligations un- with them, and bondholders, unlike lend- of the Notes and fully amortize over a pe-der the Concession Agreement. ing institutions, tend to be passive inves- riod of 25 years; however, during the first 5 years only interest is paid on the Notes.“The Notes carry a fixed The long tenor and fixed interest rate are probably the biggest advantages the Is- suer achieved by issuing a project bond,interest rate of 8.125% rather than entering into a traditional loan. Even though the Notes were rated “BB-” by Fitch and “BB” by Standard & Poor’s, which classifies the Notes as high yieldthroughout the life of the bonds, the Issuer was still able to obtain an attractive long term fixed interest rateNotes and fully amortize over due to the structure, low interest rate en- vironment, stable country risk (Peru cur- rently has a foreign debt rating of “BBB”a period of 25 years” by both Fitch and S&P) and the demand for long-term fixed income.
  15. 15. Deals Latin Infrastructure Quarterly 15 For those that are not familiar with rights are already contemplated in the half of the Indenture Trustee with respectproject bonds, the Indenture contains all payment and guarantee trust agreement to all Peruvian collateral. In addition, theof the various covenants and representa- (discussed below), the Indenture and any Notes also have the benefit of a debt ser-tions and warranties of the Issuer and the future indenture supplements for all po- vice reserve account equal to 6 months ofevents of default, similar to a loan agree- tential series of notes issued by the Issuer debt service.ment. Most of the covenants, representa- pursuant to the Indenture.tions and warranties and events of default Although the Notes are expected to Payment and Guarantee Trustare similar to what would have been ne- remain outstanding for 25 years, theygotiated in a traditional loan agreement; are subject to the following redemption The Payment and Guarantee Trust Agree-however, there are some key differences. events: (a) optional redemption with a ment is the key security agreement forAs mentioned above, the approval rights make-whole premium for the life of the the transaction. All of the cash flows ofhave been modified to reflect the different Notes, (b) withholding tax redemption, the Issuer from the Concession, includingprotocols for approving various actions, (c) change of control of the Issuer and (d) all revenues from services and insurancewhich includes giving greater rights to the mandatory redemption upon the occur- proceeds, are deposited in a revenue ac-Independent Engineer and using deemed rence of certain events of default. count and flow through the accounts es-approvals when bondholders are required tablished by the Payment and Guaranteeto weigh in. In addition, greater flexibil- Security Trust Agreement pursuant to a waterfallity was given to the Issuer before approv- that terminates with the excess cash flowals are required. This was accomplished The Notes are secured equally by first account. In addition, all payments to theby giving more materiality carve-outs priority liens and ratably on a pari passu Issuer for operations and maintenanceand increasing certain dollar thresholds. basis by (a) a pledge of all of the capital costs (including setting aside moniesAnother significant difference from a tra- stock of the Issuer held directly or indi- in a reserve account for operations andditional project finance loan transaction rectly by AIH and Mota-Engil pursuant maintenance) and Construction Worksis that the Issuer is not required to abide to a shareholder pledge agreement, (b) a are made by the Peruvian Trustee, as wellby the Equator Principles. This is not mortgage over the Concession, (c) a per- as payments required to be made to thethe case in all project bonds, especially fected beneficial and/or security interest Grantor, the Regulator and the Port ofif the arrangers and initial purchasers of in substantially all of the Issuer’s assets, Paita Social Fund under the Concession.the bonds are also Equator Principles Fi- granted pursuant to a Peruvian payment The Peruvian Trustee is also required tonancial Institutions (“EPFIs”). Two key and guarantee trust agreement (the “Pay- set aside the debt service required for thefactors that are generally discussed when ment and Guarantee Trust Agreement”) Notes and any future series of notes, asdetermining whether an issuer of a proj- entered into between the Issuer and Ci- well as any amounts required to top upect bond must comply with the Equator tibank del Perú S.A., as Peruvian trustee the debt service reserve account, bothPrinciples are, first, whether the potential (the “Peruvian Trustee”), and (d) an un- of which are transferred to the Indentureinvestors require compliance and, second, conditional and irrevocable pledge, as- Trustee for application pursuant to the In-if the initial purchaser is an EPFI, whether signment and transfer to the Indenture denture.its internal policy requires compliance for Trustee pursuant to the Indenture, for the With respect to future Works, the Pe-a project bond. benefit of the bondholders and all other ruvian Trustee is required to begin setting In order to give the Issuer maximum secured parties, of a security interest in all aside monies required for Stage 2 Worksflexibility to finance future Works within of the Issuer’s rights, title and interest in, in a separate trust account (the “Stage 2the same structure, the Indenture for this to and under any other assets. Since most Trust Account”) once container volumetransaction allows for future series of pari of the security is subject to Peruvian law, at the Port reaches 160,000 TEUs perpassu notes to be issued to finance such Citibank del Perú S.A. was appointed by year. The schedule of the amounts toWorks. Even though the Issuer is required the Indenture Trustee and the Issuer as be set aside each month, which is basedpursuant to the transaction documents to sub-collateral agent pursuant to a sub- on the financial model’s projections forset aside monies for future investments at collateral agency agreement to act on be- the Port at closing, is expected to ensurethe Port, the ability to anticipate Worksbefore the money has been set aside, solong as certain conditions precedent aremet, such as debt service coverage ratios, “Another significant difference fromallows the Issuer to choose when it makes a traditional project finance loanthe most economic sense to complete ad-ditional Works. In addition to providingflexibility, the ability to issue additional transaction, is that the Issuer is notseries of pari passu notes under the sameindenture also alleviates the need to enter required to abide by the Equatorinto intercreditor agreements, since all ofthe waterfalls, voting rights and collateral Principles”
  16. 16. 16 Latin Infrastructure Quarterly Dealsthat sufficient monies will be set aside to proceeds account. The Sponsors were droughts, plagues and natural disasters.complete the Stage 2 Works once the Port required to make equity contributions In addition, demand can be affected byhas achieved container volume equal to on or prior to the issuance of the Notes macroeconomic factors and competi-180,000 TEUs per year. to pay for their contribution with respect tion. An independent traffic consultant, Similarly, with respect to the Stage 3, to (a) the costs for Equipment Works, (b) APOYO Consultoría S.A.C., provided athe Peruvian Trustee is required to begin up-front payments for the Construction traffic study of the Port that incorporatedsetting aside monies required for Stage Works, (c) the required balance of the weather and macroeconomic factors to3 Works in a separate trust account (the operations and maintenance reserve ac- predict potential demand volatility at the“Stage 3 Trust Account”) once container count, (d) the required balance of the debt Port. This traffic study was a very impor-volume at the Port reaches 260,000 TEUs service reserve account, (e) an up-front tant component for the rating process andper year. The schedule of the amounts to amount to be set aside for the Additional for creating the financial set aside each month, which is based Investments Trust and (f) and other costs Because of the long tenor of the Notes,on the financial model’s projections for being funded and pre-funded on the issu- it was important to consider structuralthe Port at closing, is expected to ensure ance date of the Notes. elements that could provide liquidity ifthat sufficient monies will be set aside to After the issuance date of the Notes, the demand is negatively impacted at thecomplete the Stage 3 Works once the Port Sponsors are required to make periodic Port over the life of the Notes. A debthas achieved a container volume equal to equity contributions to pay for Construc- service reserve is a typical enhance-300,000 TEUs per year. tion Works and any other costs required to ment for moderate demand volatility. With respect to the Stage 4 Works, the be paid for by equity contributions, such However, in order to address significantPeruvian Trustee is required to set aside as certain Equipment Works and certain demand volatility, the Issuer was givenmonies immediately according to a sched- operating and maintenance costs. the following additional liquidity: if de-ule set forth in the Concession agreement mand decreases and either (a) containerthat ensures that sufficient monies are volume drops below 160,000 TEUs perset aside to complete the Stage 4 Works “One of the most year before 18 months have passed af-when required, as described above. The ter it reaches 180,000 TEUs per yearPeruvian Trustee transfers these monies significant aspects of (i.e., when the Stage 2 Works must beto the trustee of the Additional Invest- completed) or drops below 260,000 this project bond isments Trust on a yearly basis, or earlier TEUs per year before 18 months haveif required to complete such Works. The that the construction passed after it reaches 300,000 TUEsrequirement of the Issuer to both (a) make per year (i.e., when the Stage 3 Workssignificant additional investments at the risk was not fully must be completed), as applicable, orPort pursuant to the Concession and (b) (b) the Issuer reasonably believes thatreserve for future Works according to a mitigated, which is it will not achieve container volumeschedule mandated by the Concession, of 160,000 TEUs per year or 260,000with respect to Stage 4, and the schedules the first time this has TEUs per year, as applicable, within 1set forth in the Payment and Guarantee year of the date predicted for achiev- been accomplishedTrust Agreement, with respect to Stage 2 ing such volume levels in the financialand Stage 3, added complexity and lever-age to the structure, but it also provided for a Latin American model on the closing date (collectively, “Demand Events”), the Issuer is al-assurance to investors that the structure Rule 144A/Reg S lowed to tap into the Stage 2 Trust Ac-accommodates all future investment ob- count or the Stage 3 Trust Account, asligations of the Issuer under the Conces- project bond.” applicable, for debt service and also tosion. suspend deposits into the applicable ac- All equity contributions required to be count until a new date agreed upon withmade by the Sponsors pursuant to a spon- the Independent Engineer. The Issuersor support agreement are deposited, after Demand Risk must first demonstrate to the satisfac-passing through a separate escrow account tion of the Independent Engineer that aset up for tax purposes, into an equity pro- As with any project with demand risk, Demand Event has occurred before theceeds account maintained by the Peruvian there is always a possibility that de- Issuer will be given these rights. SinceTrustee. The Notes raised approximately mand may decrease and result in lower the Stage 2 Works and Stage 3 Works68% of the amounts needed for the Con- revenues at the Port than originally an- only need to be performed once the re-struction Works, Equipment Works and to ticipated. Since the Port is mostly export quired volume levels are reached, thisfund various transaction accounts. The oriented, the main drivers for demand additional liquidity benefits both theSponsors’ equity contributions cover the are agricultural and oceanic output in bondholders and the Issuer withoutbalance and are supported by letters of the Port’s area of influence, which can compromising the Issuer’s obligationscredit that can be drawn upon by the Peru- be affected by, among other things, cli- under the Concession.vian Trustee and deposited into the equity mate change, including El Niño, floods,
  17. 17. Deals Latin Infrastructure Quarterly 17Operating Risk erated was a very important consider- ation for bondholders. Gianluca G. Bacchiocchi is a partnerThe Issuer enjoys the benefit of the global at DLA Piper and focuses his practiceand local experience of its joint venture Negative Carry on representing sponsors, issuers andpartners in operating ports and providing underwriters in cross-border capi-related logistical services. In addition, Probably one of the most challenging as- tal markets transactions with Latinbefore the bond offering, the Issuer was pects of a non-refinancing project bond America, including project bond fi-able to operate the port for 2 and 1/2 years is how to address negative carry, which nancings, public and private issuanc-to create a positive track record that could is the interest paid on bond proceeds that es of asset-backed securities, privatebe analyzed by both the rating agencies cannot be fully deployed since the con- issuances of future-flow backed secu-and the bondholders. These factors, along struction will occur over a period of time. rities and high-yield debt issuances. with a reserve account for operating and In a number of project bonds, this issue Mr. Bacchiocchi also assists sponsors,maintenance, were able to significantly has been addressed by issuing variable borrowers and lenders with projectmitigate the operating risk to the satisfac- funding notes. In this transaction, it was and infrastructure financings, public-tion of the rating agencies and the bond- decided that for obtaining the best execu- private partnership transactions, gen-holders. tion, only one series of regular upfront eral secured and unsecured lending funded notes would be issued. However, arrangements and international debtConstruction Risk since the negative carry incurred by the restructurings. He has been named Issuer will be amortized over 25 years, a leading capital markets and bank-Based on the report provided by the In- its impact will be minimized. Since is- ing and finance lawyer by Chambersdependent Engineer, the Construction suers tend to focus on the all-in costs of Latin America.  Transactions handledWorks and Equipment Works are not the transaction, the all-in costs will not be by Mr. Bacchiocchi have received acomplex and can be completed within significantly impacted by negative carry number of awards from IFLR, Projectthe timetable established by the Issuer. so long as the bonds they issue are ex- Finance and Latin Finance, includ-Also, the EPC contractor, which agreed pected to have a long tenor. ing most recently the Latin Americanto do the Construction Works pursuant to Water Infrastructure Deal of the Yearthe EPC Contract that includes a perfor- Conclusion 2010 Award from Project Finance andmance guarantee and quality guarantee, the 2011 Americas Project Financehas significant construction experience in As project bonds have evolved, espe- Deal of the Year Award from IFLR. Peru. In addition, the supply contracts for cially over the last 6 years, sponsors now Mr. Bacchiocchi is fluent in Italian,the Equipment Works are with reputable have more options available to them, Portuguese and Spanish.suppliers of cranes who agreed to pro- even if some traditional lending op-vide performance guarantees pursuant to tions are less accessible due to the cur-the supply contracts. These factors, along rent banking crisis in Europe. Althoughwith the involvement of the Supervisor the capital markets may be unfamiliarand the Independent Engineer, helped to territory for some sponsors, the advan-considerably reduce the construction risk tages that project bonds provide spon-of the project, although construction risk sors, namely long term financing at fixedwas still a factor. rates (if US dollar based) and potentially One of the most significant aspects of lower interest rates, can significantlythis project bond is that the construction outweigh the disadvantages, namely ob-risk was not fully mitigated, which is taining consents from bondholders, dif-the first time this has been accomplished ficulty analyzing construction risk andfor a Latin American Rule 144A/Reg S negative carry, which as the Paita Portproject bond. The key reason the proj- project bond demonstrates, can be read-ect bond was able to proceed with con- ily addressed. If this was a Greenfieldstruction risk is that, as a Brownfield project, it is unlikely that the construc-project, the Port has been generating tion risk would have been left complete-revenues for years, including the most ly unmitigated for a project bond, but asrecent 2 and 1/2 years pursuant to the bond investors and rating agencies be-Concession, which allows bondholders come better at analyzing infrastructureto be paid, whether or not construction projects and governments get better atis completed on time. There still is the structuring concessions, project bondsrisk of a default under the Concession will continue to evolve in Latin Americadue to the construction, but not having and perhaps Greenfield project bondsto rely on the construction of a project with construction risk may someday be-to be completed for revenues to be gen- come a reality.
  18. 18. 18 Latin Infrastructure Quarterly Infrastructure FinancingA Brazilian fter more than a decade of economic stability and timid (when compared to other emerging countries) althoughresilient growth, it is time for Brazil to Fosteringtackle its most critical deficiency: thecountry’s infrastructure. With most of the investments in in-frastructure deployed back in the 1970’sand mid 1980´s, Brazil now faces a grimscenario: recurring power blackouts of Private(apagões), especially during draughtseasons, overwhelmed airports, roads re-quiring immediate maintenance, incipi-ent railway network and insufficient portservices. According to the latest “Global Financing ofCompetitiveness Report 2011-12”, Bra-zil, currently the 6th largest economy inthe world, occupies the 53rd position ingeneral competitiveness and only 104thin quality of overall infrastructure. This scenario is a consequence of,among several other macroeconomic fac-tors, a low rate of investments in infra-structure. It is estimated that Brazil hasinvested, in average, approximately 2% of Infrastructureits GDP in infrastructure since 1985. The Projectsmain reason for this decline in infrastruc-ture investments is the general deteriora-tion of the macroeconomic environmentverified in Brazil in the mid-1980’s, whenthe country was suffering with a soaringinflation and an upsurge in its public in-debtedness. Ricardo Simões Russo (Partner), There is consensus among all sectorsof the Brazilian society that if the govern-ment does not act energetically in order Enrico Bentivegna (Partner) andto create a favorable environment for in-vestments in infrastructure the country’s João Fernando A. Nascimentodevelopment may enter stagnation in thenext years. (Senior Associate) of PinheiroThe Growth AccelerationProgrammes (“PACs”) and Neto AdvogadosBNDES infrastructure alone reached 3.2% of the According to its own reports, BNDESAs an attempt to remedy the shortfalls country’s GDP in 2010. is likely to disburse up to R$ 150 billionconcerning public and private invest- Both PAC and PAC II program and (US$77 billion) in 2012, which representsments in infrastructure, Brazilian federal the investments deriving therefrom rely a slight increase over last year’s R$140government has put in place two large heavily in public financing. As the main billion (US$ 71 billion). This increase,infrastructure programs, the first one financing agent for infrastructure proj- although not very significant, evidencesin 2007 (“Programa de Aceleração do ects in Brazil, the Brazilian National So- that Brazil is not ready yet to reduce theCrescimento” or “PAC” - Growth Ac- cial and Economic Development Bank role of BNDES in the economy, so as toceleration Program), and the second one (“BNDES”) plays an essential role in the foster the participation of the private sec-in 2010 (also known as “PAC II”). As a Brazil’s equation to sustain economic tor in the financing of infrastructure proj-result, the share of public investments in growth, competitiveness and innovation. ects.
  19. 19. Infrastructure Financing Latin Infrastructure Quarterly 19 In addition, according to research re-ports published by the BNDES, there isa need in Brazil for investments in theamount of R$ 1,324.00 billion during the “Both PAC and PACperiod of 2010 to 2013. Further, pres-ently, approximately 90% of long termfinancings in Brazil were granted by stateowned banks, BNDES and federal finan- II program and thecial institutions. In order to accomplish the above men-tioned endeavor, the Brazilian govern-ment must improve the tools available in investments derivingthe Brazilian market, in order to promotethe participation of the private sector inlong term financings required for the im-plementation of infrastructure projects. therefrom rely heavily In this regard, recent rules and regula-tions were enacted in order to promote thecreation of a long term financing privatemarket. Such rules have as their main pur- in public financing.”pose not only foster the participation ofprivate entities on long term credit trans-actions but also aim to promote in Brazil Requirementsthe development of the local debt securi- Brazilian Reference Rate (TR);ties market. The main requirements in connection 7. interest payments cannot be made in with the issuance of Infrastructure Bonds intervals shorter than one hundred andInfrastructure Bonds – Re- can be summarized as follows: eight days;quirements and Benefits 8. the Infrastructure Bond must be regis- 1. such debt securities must be issued by tered for trading in a regulated securi-Through the enactment of Law No. 12,431, a special purpose company organized ties market; andof June 24, 2011 (“Law 12,431/11”), for the specific infrastructure project; 9. they must contain a simplified proce-which was further regulated by Decree- 2. the project to which they are linked dure to demonstrate the purpose of al-Law No. 7.603, of November 9, 2011 must be approved by the applicable locating the proceeds in investment(“Decree-Law 7,603/11”), the Brazilian ministry overseeing the industry in projects, including the ones related togovernment created certain mechanisms which the project is inserted; the intensive economic production con-to promote the use by local companies 3. offering must have a minimum nected with research, development andof the capital markets for the purposes of weighed tenor of four years; innovation.their long term financing. Among these 4. securities cannot be called upon or re-mechanisms the so-called “Debêntures deemed within the first two years of For the purposes of the ministry approvalde Infraestrutura” (Infrastructure Bonds) their issuance; mentioned in item (2) above the respec-were created, the first type of securities in 5. the buyer cannot have a commitment tive projects must: (1) be addressed to in-Brazil designed specifically to raise long- to resell the securities to the issuer; vestments in infrastructure or to intensiveterm private funds to be applied in infra- 6. securities must have a fixed interest economic production connected with re-structure projects. rate, linked to a price index or to the search, development and innovation, and“The Brazilian National Social and EconomicDevelopment Bank (“BNDES”) plays an essentialrole in the Brazil’s equation to sustain economicgrowth, competitiveness and innovation.”
  20. 20. 20 Latin Infrastructure Quarterly Deals(2) aim at the establishment, expansion, In addition, foreign investors that No. 3,836, of February 25, 2010. In Junemaintenance, repair, adaptation or mod- make the acquisition of Infrastructure 11, 2010, MP 472/09 was converted intoernization, among others, of one of the Bonds are subject to the Brazilian so- Law No. 12,249 (“Law 12,249”), whichfollowing areas: (a) logistics and trans- called “IOF exchange” assessment (tax further defined the legal terms and condi-portation; (b) urban mobility; (c) energy; assessed at the foreign exchange transac- tions applicable to the letras financeiras.(d) telecommunications; (e) broadcasting; tion verified at the moment of the entry The main characteristics of the letras(f) sanitation, and (g) irrigation. of the investment proceeds in Brazil) at financeiras are: Infrastructure Bonds must be distrib- a 0% rate (as opposed to a rate that mayuted by means of public offerings pursu- reach up to 6% in other types of fixed in- 1. they are fixed income instruments is-ant to the Normative Ruling No. 400, of come investments). sued by financial institutions;December 29, 2003, issued by the Brazil- 2. they have a minimum maturity ofian Securities and Exchange Commis- twenty-four (24) months; andsion (Comissão de Valores Mobiliários “The so-called 3. their minimum nominal amount is R$– CVM), or also by means of public of- 300,000.ferings with restricted efforts (i.e., for alimited number of investors and without “Debêntures de The first letras financeiras issued with thethe need for registration with local secu-rities commission), pursuant to the CVM Infraestrutura” abovementioned characteristics were reg- istered with CETIP (Central Agency forNormative Ruling No. 476, of January Custody and Financial Settlement of Se-16, 2009. (Infrastructure curities) in April of 2010. One year later, The offerings of Infrastructure Bonds the stock of such instruments had alreadythat are subject to the terms of Law12,431/11 must be made prior to the Bonds) were reached R$72.8 billion. At the end of March, 2012, the stock of letras financei- created, the firstdeadline of December 31, 2015. ras reached R$175.6 billion.Tax Aspects – Benefits of the A market for long term privateInfrastructure Bonds type of securities debt instrumentsLaw 12,431/11 not only created a specifictype of long-term investment, but also es- in Brazil designed In order to increase the trading volumes of all these private, long-term bonds, thetablished additional measures to stimulate Brazilian government is structuring, to-the market for Infrastructure Bonds, espe- specifically to raise gether with the private sector (under thecially by means of the tax treatment appli- coordination of ANBIMA), the Liquid-cable to the investors in such securities. long-term private ity Enhancement Fund (Fundo de Apoio à Under Law 12,431/11, in general Liquidez – “FAL”), which main purpose isterms, income earned by investors shall funds to be applied to function as a “market maker”, funded bybe subject to the Brazilian withholding BNDES and by mandatory deposits heldincome tax, at the following rates: by banks with the Brazilian Central Bank in infrastructure under mandatory reserve requirements.1. 0% (zero percent) when ascertained The idea behind FAL is to provide a by foreign investors (provided they projects.” safer environment for individuals and for- are not resident or located in tax heav- eign investors interested in investing in en jurisdictions); this new debt instruments, thus increasing2. 0% (zero percent) when ascertained Other measures to stimulate trading volumes for corporate debt (espe- by individuals that are tax residents in long-term private financing cially in the secondary market). Brazil;3. 15% (fifteen percent) when ascer- Brazilian federal government also estab- Conclusion tained by Brazilian legal entities that lished additional measures to stimulate are subject to taxation according to the market for long term financing, such As seen from the initiatives described above, the “actual profit regime” (lucro real), as exempting the long-term bank bonds Brazilian Government has put in place sev- “estimated profit regime” (lucro pre- called letras financeiras from mandatory eral measures to promote long term invest- sumido) or “imposed profit regime” reserve requirements. ments in infrastructure. These measures en- (lucro arbitrado); tax- exempted legal The letras financeiras were created tail the continuance of public investment and entities; or legal entities subject to the by Provisional Measure No. 472, of De- financing related to infrastructure projects, as Simplified Tax Payment System for cember 15, 2009 (“MP 472/09”), which well as the creation of a friendlier environ- Small Businesses and Small Compa- was regulated in the following year by ment for the private sector to participate in nies (Simples Nacional). Brazilian Monetary Council’s Resolution the long-term corporate debt market.
  21. 21. Deals Latin Infrastructure Quarterly 21 Enrico J. Bentivegna João Fernando A. Nascimento Ricardo Simões Russo Telefone: +55 (11) 3247-8719 Telefone: +55 (11) 3247-8798 Telefone: +55 (11) 3247-8720 São Paulo São Paulo São Paulo Enrico J. Bentivegna has been a João Fernando A. Nascimento has Ricardo Simões Russo has been member of the corporate area of been a member of the corporate a partner at Pinheiro Neto Advo- Pinheiro Neto Advogados since area of Pinheiro Neto Advogados gados Corporate Area since 2009. 2000, and is based at the São since 2000, and is based at the He focuses his practice on financial Paulo office. He practices in the São Paulo office. He practices in and banking law, foreign exchange, areas of securitization of receiv- the areas of corporate finance, M&A and securities markets. Ri- ables, investment funds, corpo- project finance, trade finance, debt cardo has a LL.B. degree from the rate law, mergers and acquisitions, restructuring, regulation of finan- Catholic University of São Paulo capital markets, and regulation cial institutions and banking prod- (1997). He also has a LL.M degree of financial institutions, project fi- ucts, having graduated from the in Banking and Financial Law from nance and PPPs (Public-Private Mackenzie University in 2002. He the Boston University School of Partnerships). Having graduated worked as a foreign associate at Law (2002). Fluent in Portuguese, from the University of São Paulo Hughes, Hubbard & Reed (Miami) English, Spanish and Italian, he Law School (1996), he holds a in 2008-2009. He was admitted was a foreign associate of Cleary, specialization course in Corpo- to the Brazilian Bar Association in Gottlieb, Steen & Hamilton in 2002 rate Law from the same University. 2002. and 2003. He was admitted to the He worked as a foreign associate Brazilian Bar Association in 1998. at Hunton & Williams (Miami) in 2004. He was admitted to the Bra- zilian Bar Association in 1997.
  22. 22. 22 Latin Infrastructure Quarterly Companies O ur major customers are min- ing companies that use the terminal facilities to export their different products, con- sidering that the amount of cargo moved through Matarani Port represents the 50%Peru Port of Matarani of their total cargo. Among them we can name Sociedad Minera Cerro Verde Port Free McMoran, Xstrata Copper, Compa- nia de Minas Buenaventura, Glencore, Ares and Suyamarca that belong to Ho- schild group, and Minera Pampa de cobre internacional of Milpo Group. Copper concentrate, cop- per cathodes and gold concentrate are the main products which are shipped to ports in Asia. It is worth mentioning that Tisur is a multi-purpose port due to the experience at handling all types of cargo. The econo- my of the region is growing significantly and the road infrastructure is improving, allowing the communication among other towns and making new important projects possible. Based on this, we can say Mata- Terminal rani is on its 25% capacity. As a result, a very important growth will be seen in the del sur following years, especially in container cargo by decreasing the mining relative weight in our operations. In container cargo, our Customers are Tecnológica de Alimentos S.A. – Tasa and Pesquera Diamante which export fishmeal to Asia. Consorcio Peru Murcia and ALSUR S.A produce agro industrial products that are shipped to The USA and Spain, Inkabor S.AC distributes borate in The USA and Europe. How would you describe the state of the economic infrastructure assets bringing those products to the Port’s facilities? (Roads, railroads, navigable rivers (if any))The Port of Matarani (the “Port”) is of great importance Being a strategically multi-junction offor the south region of Peru, who are the main clients of different roads and the southern rail road,Terminal Internacional del Sur (“TISUR”), which are the among them the main road that connectsmain products exported from its facilities and the main the country from south to north. Two roads to the Peruvian highlands and con-destinations of Peruvian production coming out of the necting with Bolivia and the central statesPort’s facilities? of the Brazilian amazon. As regards air transport, RodriguezLIQ talks to Erick Hein Dupont, Ballon International Airport in the city of Arequipa is located 120 km from the port.General Manager TISUR has held the concession since 1999, could you describe the invest-