International banks unlikely to debt finance Argentina’s new PPPs

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International banks’ appetite for debt financing Argentina’s upcoming programme of infrastructure projects via a new public-private partnership (PPP) structure is likely to be extremely limited.

The first Argentine PPP projects will be awarded by the end of April, with an estimated value of a little over $5 billion. These projects are part of three tranches of deals that are expected to be awarded in 2018, made up of 13 highways and two bridges.

However, one head of project and trade finance at a large European financial institution that has big Latin American operations told Euromoney at the IDB conference in Argentina that he wasn’t prepared to finance any of the projects.

“There is too much risk for long-term projects in Argentina,” he said. “None of my colleagues at other banks will finance the debt portion either – except for maybe the Chinese banks.”

He said that purely domestic projects, such as the toll roads, come with too much regulatory and pricing risk over the lifetime of the project.

“Who knows who Argentina will elect during that period? A future presidential candidate might propose scrapping the tolls, win an election, and, given the instability in the country’s history, that’s not too remote a possibility. The returns on debt financing are too low to warrant this risk.”

He added that he believes investors could well be interested in equity portions, but would be expecting very high returns.

These regulations create the right legal conditions for the growth of the Argentine capital markets. We are just waiting for the economic environment 

 – Justo Segura, Cabanellas Etchebarne Kelly

This would place the financing burden on multilateral agencies, possibly Chinese banks, and debt financing the winning consortiums through corporate bonds rather than project-specific securitizations.

The government says that it has received bids from 10 consortia made up of about 40 private-sector companies for the first contracts.

The government has been hoping to maximize international investors’ interest by making the contract payments dollar-denominated – avoiding the FX financing mismatch that has frustrated local-currency PPP efforts elsewhere in the region.

The senior banker remarked that some banks may be interested if the project is export-based, as he believes any future government would be less likely to radically change regulation of a project that does not have direct exposure to the local population and is a driver of the economy.

However, if banks are not prepared to be involved in debt financing in the first wave of PPPs, it will be a blow to finance minister Luis Caputo, who is hoping that infrastructure investments will play a multitude of important short-term roles in the economy. 

These include bridging the investment gap as the private sector waits for inflation and interest rates to go lower; driving GDP growth above the crucial 3% level necessary to support the ministry of finance’s gradual fiscal adjustment; adding jobs to maintain popular support for president Mauricio Macri; and improving competitiveness and productivity in a country that saw investment in infrastructure fall to just 3% of GDP during the previous administration.

Local financiers are more upbeat.

Marcos Wentzel,

“We expect about $6 billion in highway deals to be [invested] in the next four years,” says Marcos Wentzel, public sector director at Argentine investment bank Puente. “And it’s not just highways; next will come local rail projects, energy and public schools – a lot more is coming.”

The PPP law envisages slicing the government’s payments to the winning consortium throughout the construction phase to minimize the speed of the increase of debt on the government’s account.

The PPPs will be a test of the 2016 law that regulates new public-sector projects with the private sector. The next regulatory-driven impetus for financial growth is a new capital markets law that removes some of the more invasive powers granted to the last government. The hope is that this will create the regulatory framework to enable the domestic capital markets to grow.

“These regulations create the right legal conditions for the growth of the Argentine capital markets,” says Justo Segura, lawyer at local firm Cabanellas Etchebarne Kelly. “We are just waiting for the economic environment.”

Argentine bankers expect that it will take Macri’s whole first term to get inflation and interest rates down to levels that will enable companies to practically invest using domestic capital market products – as well as to create the conditions to attract some of the $120 billion of Argentine private wealth that was declared in the recent tax amnesty, of which “nearly all” is still invested offshore, according to Wentzel.

Meanwhile some of the regions have also been financing projects entirely on their own. For example, Cordoba recently re-opened its 2017, $150 million 10-year bond at 7.125% to finance the development of a gas pipeline.

Private banks are also tapping the international markets, with Galicia’s chief executive Fabián Kon telling Euromoney at the IDB that it has just closed a $100 million green bond bought by the IFC. The deal could be re-opened once the current money is allocated to projects that increase energy efficiency by up to 15%.

“It’s the first green bond from an Argentine issuer and really demonstrates the IFC’s push in this area,” says Kon, who adds that his bank’s relationship with the multilateral goes back over 20 years.

Maintaining the existing appetite for Argentine credit in the international markets, at current yields or better, is critical for the country.

The sovereign has raised $15 billion in the international markets but, at just 50% of its annual financing needs, it takes up a lot of local liquidity by seeking the rest from local investors.

Wentzel says local companies could seek up to $200 million locally, but any more would require liquidity only found internationally.

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