What opportunities does the Mexican Infra sector offer to lenders?

Tuesday, May 23, 2017

Mexico's infrastructure sector has faced a complex scenario during the past few years due to reduced public spending and the impact of domestic and international factors on the Mexican economy. In addition, the introduction of public-private partnerships have changed the rules of the game for all the actors involved in the development of the country's infrastructure, including providers of finance.

BNamericas spoke with Alejandro Frigolet and Luis de la Fuente (pictured), chief financial officer and executive director for infrastructure, respectively, at Grupo Financiero Interacciones, the country's largest specialized financial group in providing government and infrastructure lending, to learn more about the challenges and opportunities for infrastructure lenders in the Mexican market, as well as the significant role that the firm has been playing in the development of Mexico's most important projects.

BNamericas: What kind of services does Grupo Financiero Interacciones provide regarding infrastructure financing? 

Frigolet: As a financial group, we've been in the market for almost 25 years. We provide financing to infrastructure projects mainly at the state and municipal levels. Through our infrastructure banking unit, we finance special purpose vehicles [SPVs] that already have a specific project. We've financed what we considered to be 'landmark' projects, such as water treatment plants, bridges, bypasses and highways. We've also financed prisons, hospitals and health centers, cultural initiatives such as museums, as well as energy-related projects.

Our bank has a 106bn-peso [US$5.57bn] portfolio. It's the third largest Mexican bank and the country's largest specialized bank. Apart from our stock brokerage, we also have an insurance company specialized in insuring infrastructure projects. In addition, through our recently-launched leasing unit, we help equip infrastructure projects.

For our infrastructure banking unit, our lending targets range between 100mn and 1.5bn pesos, with an average of 500mn pesos. We're focused on financing basic infrastructure projects of a certain size, which also need good consulting or advising input. Each of the projects that we finance is tailor-made, given that each one has certain payment sources and the financial code changes depending on the state where the project is developed. 

Our portfolio is very healthy too. Our past-due loan portfolio balance literally amounts to zero because the SPVs that we finance have a trust set up, where the payment sources are usually federal funds.

We provide comprehensive solutions for infrastructure projects. 

BNamericas: What does your infrastructure financing portfolio look like?

De la Fuente: To date, we're financing 82 projects, 45 of which are at a greenfield stage, while the remainder are already at the brownfield stage. For the former, we provide financing throughout the progress of the construction works, while the latter are mainly public-private partnerships [PPPs] that are already paying down the debt in installments. Those are long-term projects, for which the federal, state or municipal governments provide remuneration. 

Our lending portfolio amounts to over 30bn pesos. We finance projects at the three different government levels. About 50% of the projects we finance are PPPs, while the rest are either conventionally-financed public works.
The tailor-made approach is very important for us. We don't finance companies, we finance projects. We get involved from the start of a project, before the signing of a contract, to make sure that the contracts to be signed are bankable and financially feasible. For us it isn't just about lending money, but about providing the complete package of advisory services. 

We're geared towards financing basic social infrastructure, which has the least volatility in the current global context. The need for social infrastructure is there and the government is gradually allocating more funds to meet those needs.

BNamericas: Based on your 1Q17 results, your infrastructure loan portfolio had a 45.1% year-on-year increase. What does the future look like for this portfolio?

De la Fuente: Our [infrastructure loan] portfolio grew from 20bn to 30bn pesos in a year because we've built a very important project backlog. The projects already under construction that we finance will yield a turnover of 9bn pesos, and the projects about to be completed will increase that turnover. In addition to that, we've already identified another 30bn pesos in projects that may be subject to financing, which are about to start maturing and will probably become part of our portfolio within two to three years.

Our portfolio will continue growing at the same rate. If you look at our project backlog and those projects already under construction, our portfolio will reach approximately 40bn pesos, which is the guidance that for our infrastructure unit for this year.

BNamericas: Did the number of PPP projects that you finance also increase?

De la Fuente: It keeps growing over time. Two years ago, 35-40% of the projects that we financed were PPPs and is now around 55%. Nowadays, more PPPs  are launched at the state level. Not every state has their own set of laws and regulations regarding PPPs, but I think that due to some factors, such as the use of unsolicited proposals, we'll be seeing a lot more PPP projects at state level. Some states are ahead of others, but [implementing PPPs] is definitely the way to reduce the financing gap that still exists regarding basic social infrastructure.

BNamericas: What kind of opportunities do PPPs offer for providers of infrastructure financing? 

De la Fuente: The regulatory framework for PPPs is increasingly more robust, not only at federal level, but also at state and municipal level. PPPs provide great certainty to payment sources. In our particular case, operating mainly at the state and municipal levels has given us a significant advantage as there's little competition. Very few banks are directly financing infrastructure projects as we do and those banks don't have the same level of expertise as us.

BNamericas: How have unsolicited proposals changed the market for PPPs in the country? 

De la Fuente: These proposals have brought exceptional dynamism to the market for PPPs. Before unsolicited proposals were used, only the government could propose a project to satisfy a certain infrastructure need. Preparing an executive project is a very complex task and not every state government has the capacity or the resources to do so. Unsolicited proposals open doors for a contractor to carry out all the work that previously only governments could do. They can come up with an executive project, which also includes a financing structure to complete a certain initiative. They practically structure the entire project and all the government has to do is launch a tender. This enables many third parties to participate in construction of infrastructure and it thus also opens the doors to financing providers such as ourselves. So we're going hand-in-hand with the developers to submit unsolicited proposals.

We've already made a name for ourselves in this business, so a lot of the people preparing unsolicited proposals come directly to us. They know about our expertise in finding tailor-made solutions to finance this type of project.

BNamericas: What risks come are involved with financing PPP projects in Mexico? 

De la Fuente: There are two major risks. The first is the source of payments, a topic that we're very knowledgeable of. We know the exact time to finance a PPP and through which sources of payment. We secure the source of payment through a very solid financing structure, so we know how to face that situation. That's actually the bank's core business.

The other challenge is performance risk, which is related to the contractor's ability to build and provide the services required by the PPP project. We also have expertise in dealing with that risk and it's something we've analyzed thoroughly.

Another risk is the project's feasibility. At the group's infrastructure unit we also have great experience in validating the executive project of an initiative. Because of our significant knowledge of these aspects, our past-due infrastructure loan portfolio balance is zero.

Frigolet: We choose to finance projects that are feasible and that really respond to local economies. We're also interested in maintaining our reputation, and for that reason we focus on financing projects that make sense from an infrastructure standpoint and that really respond to social needs. We would also never engage with a company that has a bad reputation or that has ever defaulted on a loan payment. We're very careful with those things.

The process to mitigate the risks seems very simple but it's a very complex. Some of our competitors have had bad experiences because they thought that entering this sector was very easy.

BNamericas: What role do you envision for Grupo Interacciones in the infrastructure sector in the future?

De la Fuente: I'd say that we're already leaders when it comes to financing basic social infrastructure at state and municipal level in Mexico and we'll continue being a benchmark, because we've developed a specialized expertise. We're a reference point when it comes to financing social infrastructure in Mexico.

Frigolet: We'll offer a larger number of products. We'll keep providing innovative financing solutions for states and municipalities alike. 

About Luis de la Fuente / Alejandro Frigolet

Alejandro Frigolet serves as Chief Financial Officer of Grupo Financiero Interacciones. He previously worked as a consultant for PricewaterhouseCoopers, and has 20 years of experience in the financial sector. He was Accounting and Financial Regulations Officer of Banco del Ahorro Nacional y Servicios Financieros. He holds an MBA from the University of Texas at Austin and Instituto Tecnológico y de Estudios Superiores de Monterrey (ITESM). He holds a public accountant degree from Instituto Tecnológico Autónomo de México (ITAM).

Luis de la Fuente serves as executive director for infrastructure at Grupo Financiero Interacciones' banking unit. He worked at Grupo FInanciero Interacciones from 2003-2005 and joined the group again in 2005 as executive director for business banking. He also served as executive director of the group's SME banking unit. He holds an MA degree in banking and financial markets and  BA in business administration from Universidad Anáhuac.

About the company

Grupo Financiero Interacciones is a Mexican holding company engaged in the financial sector. It was founded as a brokerage, but later went on to acquire an insurance company and open a banking subsidiary specialized in infrastructure financing and investment banking operations. Interacciones main assets are its banking subsidiary Banco Interacciones, stock brokerage Interacciones Casa de Bolsa, and retail insurer Aseguradora Interacciones.