Funding has become harder to find for large energy and infrastructure projects over the past two years in Latin America. This is mainly due to weaker commodity prices, government budget cuts and institutional weakness in some Latin American countries. In response to these difficulties, new financing instruments are beginning to emerge, while others that are already operating in the market are being modified, with the aim of reducing risks and attracting investment funds and other investors to finance infrastructure, energy and mining projects in Mexico, Brazil, Peru, Colombia and other countries in the region.
We have outlined below some of the ways that Mexico is dealing with these issues to finance its plans for the future. In the last couple of years it has created several new finance tools that could possibly be replicated in other countries.
Last year, the government announced various measures to promote the development of capital markets to finance infrastructure, among the most notable being the creation of infrastructure and energy investment trusts, known as Fibra E.
With this tool, companies can monetize their assets by placing their holdings in operating infrastructure and energy projects in a trust. The trust will issue investment units (known as CBFEs) that will be placed through a public offering on the Mexican stock exchange (BMV). At least 75% of Fibra E investments must be in assets such as highways or refineries, which are already generating known medium and long-term cash flow.
From an energy perspective, Pemex, which is currently severally unfunded, is studying the inclusion in Fibra E of pipelines, storage terminals and other logistics assets to focus on exploration and production, its core business. Electric utility CFE also experiencing a severe budget crisis is looking at placing on the market its transmission lines and networks.
From a construction perspective, Moody's stated in January, that construction companies such as Infraestructura Energética Nova and Fermaca Enterprises, which already have a portfolio of assets with stable cash flows could benefit greatly. The sale of a share in the assets of these companies would offer them an alternative source of financing, since the proceeds could be used to finance new projects.
In any case, both energy companies and large construction firms can profit from this new instrument given the tax advantages it grants to investors. Fibra E is a scheme in which neither the financial vehicle nor the companies in which they invest are subject to income tax. The other advantage is that Fibra Es must distribute among the holders of 95% of their taxable income at least once a year which is attractive to pension fund administrators.
In addition, the Mexican government launched late last year investment project certificates (called CerPI), variable income securities designed to finance new infrastructure projects from scratch. With the focus on greenfield projects, this instrument involves greater risk than Fibra Es, but also offers greater benefits from long-term projects.
The other instrument launched by the Mexican government is education bonds or certificates of national school infrastructure (known as Cien), with which it seeks to securitize projects equivalent to 25% of FAM, the fund used to finance educational infrastructure. These flows from the education budget are put in an investment vehicle that issues bonds. The advantage is that the flow is very certain and well known because it's the education budget, a very important part of the federal budget.
In December, the first issue of Ciens raised 8.58 billion pesos (about US$490 million) at a fixed rate with a semiannual coupon of 8%. The issue received 42 offers from 23 institutional investors, such as Afores and insurance companies. The objective of the education ministry is to raise 50 billion pesos in 2016-18 through new issues.
All in all, Mexico is trying to overcome its finance challenges by being creative and identifying finance tools that can be attractive to investors. There is still uncertainty if they will work as planned due to taxation questions, interest rates, and whether the regulation of pension funds in Mexico will change to allow them to invest in alternative areas. Currently, the pension fund investment vehicles (Siefores) can invest only in sovereign debt, CKDs and shares of companies with high credit ratings. At this point, many Latin American countries will be waiting to see how these new changes play out and whether they deliver the desired results.
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