A look at project finance and trust funds in LatAm

Friday, May 12, 2017

BNamericas talked with Raimundo Díaz head of the Americas for TMF Group and Cristián de la Cerda, managing director of the firm's Santiago office about the landscape of project financing in Latin America and the relevance of trust funds for the development of large investment projects.

The experts point out that there has been a "huge interest" in Argentina since market-friendly Mauricio Macri became President at the end of 2015.

BNamericas: How do you take part in project financing, as financiers or investors?

Diaz: When there is an operation of this caliber, especially in the project finance, a special purpose vehicle (SPV) is created, an investment vehicle dedicated specifically to it, then what we do is the administrative management of the operations: we structure the deal, the way the parties have wanted to define it, and then what we do is take the accounting and payment management to investors, payments to the state through taxes, as investors have decided. We actually manage the vehicle but we are not the ones who bring the investment, nor are we the ones who get the dividends. We are trustees of these operations and what we do is take all the administrative management of these financial projects.

BNamericas: In other words, your participation is to facilitate the arrival of investors to the projects.

De la Cerda: For these operations to be carried out, specialized entities are needed, such as law firms in Chile and the US, in New York specifically, and companies such as ours that act as collateral agents, or fund managers in the case of local funds, as in Argentina, where trusts are used much more. In some parts the trusts are regulated entities, and in Argentina they act like regulated entities. In Chile, we have the funds administrators, which is the activity that fulfills the function of the trusts.

Diaz: Banks in general are the market makers, those who generate the market and who are the investors, for example for a wind farm or a dam, which are large operations that require billions of dollars; the banks identify the participants in the financing, lawyers structure the contract from a contractual point of view and define the vehicle through which both financing and construction will be managed, and what we do is carry the administrative part of this vehicle that has been defined by lawyers and identified by bankers as far as funding sources are concerned.

BNamericas: How do you view the project finance landscape in Latin America?

Diaz: Speaking of Latin America in general and South America, in particular, what we see is that the appetite of investors for this type of large financing is usually closely related to the attractiveness of countries in attracting investments. For example, with the change of government in Argentina we saw that it generated a huge interest, especially since [President] Macri agreed to pay the debt with the holdouts that had been frozen for a long time. We have also seen something similar in Uruguay and Brazil. Chile has always been an interesting country in that respect.

De la Cerda: Something that happened recently in Chile was the tender held by the government for the supply of energy for the coming years, in which the offering by investors was much larger than what was required. This reflected a very big investor appetite, especially for unconventional renewable energies. There you have a typical case of many projects that are going to be carried out in Chile, which will have to search for financing. Banks will take part as Raimundo explained, and there will be companies that will be in charge of materializing them through investment funds and structured financing.

Many of the investors that have financed this type of projects in Chile are our clients. The solar projects in the north of the country, which are US$400mn-500mn projects, you basically have companies that build the projects and some remain and operate them, and others sell to a third party when they finish construction.

Some years ago in Chile it was the highways that generated a lot of business in corporate finance and now it is electricity projects. Investors are also coming here today to buy entire office buildings and European insurance companies looking for different ways to invest in Chile.

BNamericas: How do you view the prospects for trust funds in Brazil?

Diaz: That is an interesting question because last year we acquired the trust portfolio of Deutsche Bank. What we are seeing is that there is a very interesting process in Brazil, in which on the one hand this type of operations that we have described to you were quite non-existent, among other things, because the hyperinflation and [high] interest rates made long-term project financing by private entities prohibitive. What we see now is that one of the ways that the current government is seeking to 'give life' to the economy is through the infrastructure projects. Since the country does not have enough money, this requires private sector financing. They are now establishing ways to structure these investments, which include the participation of international investors.

Brazil was tremendously protectionist until now, but I believe they are increasingly looking at the international market as a way of financing these projects. So Brazil is one of the countries in the region that has the greatest potential, more than anything else from where it starts. They are starting from a very low point, but the investment potential in the country is enormous. So this is an area that is going to grow almost exponentially in the coming years.

Another market that has been very active due to changes in policies is Argentina, where a series of enormous possibilities have opened. This vehicle [trusts] has been very interesting in Argentina because it has traditionally been used as a way to attract investment and to obtain cheaper financing compared to the banks. Besides being a market that is more accustomed to the trust, now a series of investment opportunities are emerging, mostly as a result of the lack of projects they had for many years and the [Macri] government's efforts to revitalize the economy. Infrastructure projects are under consideration, which both the Argentinean and Brazilian governments cannot finance by themselves. And this will require funds such as trusts or others to be financed, which may be a much cheaper way than going to open market.

While this type of products are in their infancy in Brazil, Argentina has the advantage of already having a fairly long history [with trusts] and it has an existing market that is large from the point of view of supply and demand.

De la Cerda: Something similar happens in Chile where the trust [alternative] has not developed too much. This is basically due to Chile having a very open financial market, unlike Argentina where the financial market is quite closed, with very high interest rates and where it is very difficult to establish indexation clauses. In Chile you have an open and competitive financial market with very low interest rates, and the possibility for the foreign investor to access it in a very fast way.

BNamericas: What would contribute to giving more impetus to the development and use of trust funds in the region?

Diaz: Fundamentally the control of inflation, which is closely linked to interest rates, and that is what makes a person who invests see that his investment is not diluted. Also the whole issue of exchange stability, especially if investments are in local currency, and finally, a large investment program because this type of financing is usually for wind farms and for infrastructure projects that require a large investment.

De la Cerda: Clearly the first variable that is required in any country is that there is economic and financial stability, and that it is a country with growth prospects, that is what attracts investors. In order for projects to emerge, there must be conditions of political and economic stability within countries and that [public] policies will be maintained over the long term, so that these long-term projects will have a predictable legal scenario. That makes financing through corporate entities, such as [pension fund managers] AFPs in Chile, possible when a country has a favorable business climate.

Cristián de la Cerda