Infrastructure Bonds in Chile

1
Infrastructure Bonds in Chile
Jorge Domínguez Director Corporate Finance
Latinamerica
Washington D.C.,June 3, 2003
2
The Chilean Concession Program
Origins and Objectives

• Lack in infrastructure and shortage of resources
  to make the investments
• More than US3 billion investment required
• Chilean Government designed a mechanism that
  allows the participation of private sector in the
  construction, maintenance and operation of
  infrastructure
• Three main objectives were
• Use private sector resources to develop and
  finance public works
• Externalize construction and operation of the
  facilities, improving service level
• Release public resources to focus in projects and
  programs with higher social yield
• Some projects (ones with less traffic or expected
  income) received a subsidy

3
The Chilean Concession Program
Successful Awarding

• Up to 2001, the Chilean government awarded in
  concession most of Route 5 which links the
  country from north to south (average stretch of
  200 kms and a US250 million investment) and 4
  highways linking Santiago to the coast and
  Argentina
• Also were awarded 4 urban concessions in Santiago
  (average stretch of 30 kms and a US400 million
  investment)
• Most of the concession have been awarded to
  Spanish Sponsors
• Airports, water facilities, and jails have also
  been and are still being auctioned under the
  concession mechanism
• The Concessions Program allowed to completely
  update the highway infrastructure of the country
  to a modern standard

4
Financing Needs

• Considering minimum equity requirements for
  10-15, at least US2,5 billion financing was
  required
• Ideal financing should consider
• long tenors
• customized amortization schedule
• local currency
• fixed rate
• project risk
• limited recourse to the sponsors

5
Available sources of funding

• International banks and/or investors, having
  problems with
• local currency
• Local Banks, having problems with
• long tenors
• fixed rate
• Local institutional investors, having problems
  with
• project risk
• Local institutional investors were the best
  choice if project risk was avoided

6
Available sources of funding

• Since 1980, the pension funds system (AFP)
  gradually become a replacement of the State in
  the role of providing pension. They monthly
  receive important resources from employees, and
  invest in capital markets
• Currently, the AFPs portfolio is composed by
  variable and fixed income instruments, with a
  total portfolio value of approximately US35
  billion

• Life Insurance Companies receive retirement funds
  and provide annuities to its customers
• They often select longer tenors in order to hedge
  their liabilities
• Life Insurance Companies currently manage
  approximately US12 billion.

7
Santanders involvement

• Santander focused in the search of players with
  capacity in understanding and absorbing project
  risk
• Considering that Chiles sovereign rating reached
  a solid A- investment grade, monolines become
  available to enhance the issuance of local
  securities providing their wrap
• Santander developed the wrapped bond, in a close
  involvement with sponsors, monolines and the
  local capital markets
• Main benefits of the structure
• sponsors access to the local long-term market
• institutional investors securities with very low
  risk at higher spread that the sovereign
• monolines efficient structures to enter the
  Chilean market

8
Development of Infrastructure Bonds market in
Chile

• July 2000 the 2nd
• Infrastructure Bond
• is issued
• (Insurer XL Capital)
• Collipulli-Temuco
• US208 million

• 1st semester 2001 the 3rd
• Infrastructure Bond
• is issued (Insurer XL Capital)
• Chillán-Collipulli US210 million

• Chile was rated
• A- opening the chance
• for Monoline Insurers
• to consider operations
• in the country

• The first Concessions
• awarded begun looking
• for long term financing.
• The first was
• Talca - Chillán
• The Concessionaire
• contacted Santander for
• structuring the financing.
• Santander started
• conversations with the
• consortium MBIA-AMBAC.

• In November 1998
• the first Infrastructure
• Bond of Latin America
• was issued
• (US150 million).

• In the 1st semester
• 2002 the next 2
• Infrastructure Bonds
• were issued
• Santiago-Valparaíso US280 million
• (The largest bond placement in the
• local market). Insurers IADB/FSA
• Santiago San Antonio US135 million
• (Insurer FSA)

9
Rutas del Pacífico a summary of the deal

• Santander begins in mid
• 1999 negotiation of the
• Mandate with the
• Concessionaire
• The Concessionaire has
• not decided yet for
• Infrastructure Bonds.

• Mid 2000 Santander gets
• the Mandate.
• By mid 2000 the Collipulli-
• Temuco bond was successfully
• placed.
• The search for an Insurer begins

Mid 2001 IDB and FSA are hired as Insurers.

• April 9 the Bond was placed
• UF11.424.000 (US280 million)
• the largest bond placement in the local market.
• Bond rate PRC1,106,02 the lowest rate
  achieved by an Infrastructure Bond

• Term Sheet Agreed
• Begining of the due diligence process
• Beginning of the Documentation Process

The structuring process took 1 year. Some major
issues in the structuring were

• IssueComplementary Works were demanded by the
  MOP, making the financing needs larger.
• Solution optimization of
• debt repayment profile
• additional guarantees.

• IssueThe original traffic
• study considered much higher
• GDP growth and lower evasion.
• Solution Adjustment of the financial
• structure (required ratios, guarantees etc.)
• to the new scenario.

• Issue The term of the concession is variable
• Solution implementation of
• a mechanism of mandatory prepayment to match
• Debt/Concession.

This Financing obtained the 2002 Deal of the
Year award granted by Project Finance Magazine
and Project Finance international.
10
Current financing situation

• Financing

• Links Santiago - Coast and Argentina

Santiago-Valparaíso
Infrastructure Bond in UFsissued
Santiago-San Antonio
Infrastructure Bond in UFsissued
Santiago-Los Andes
Infrastructure Bond in UFsissued
Red Vial Litoral Central
Bank Loan

• Of the 16 toll road concessions awarded, 11 have
  opted for the alternative of
• Infrastructure Bonds, 3 have financed through
  bank loans and 2 concession have
• not decided yet the financing.
• Infrastructure Bonds have clearly been the
  preferred alternative for financing.

11
New projects to consider

• Santiago Transport Plan
• Northern sanitary companies
• Block III Jail Program
• North East access to Santiago
• Chiloé Bridge
• El Salto - Kennedy tunnel
• Quinta Normal and Gran Avenida intermodal
  transfer stations
• Arica s Airport
• Block IV Jail Program
• Convento Viejo dam
• Development of local project financing