Mobilizing Private Financing:
The Capital Market Story of Mexico
May 2014
Content
Mobilizing Private Financing: The Capital Market Story of Mexico
a) The fundamental changes in infrastructure financing introduced in the
Mexican context: 2000 – 2013
b) The financial model for pooled financing through bond banks in
Mexico
c) The impact of pooled financing for Mexican urban infrastructure
i) Micro level: Example transactions.
ii) Macro level: Changes in the volume of long term domestic financing
for infrastructure since 2000
Background
•
In March 2002, USAID/Mexico and Evensen Dodge International Inc.
(EDII), a global public finance advisory firm, entered into cooperative
agreement and in 2005 into Global Development Alliance partnership.
Evensen Dodge is a historic firm
 Evensen Dodge founded in 1922, was the
first independent financial advisory firm in
the US.
 Participated in developing the US
subnational (municipal) bond market.
 Has assisted over 1000 subnational
organizations access financing over $200
billion.
 Is working internationally with USAID as
Evensen Dodge International.
 In Mexico mobilized $2 billion with USAID
GDA Program
Global Development Alliance Objective
•
Through a Global Development Alliance, USAID and Evensen
Dodge International are pursuing sustainable financing
strategies, specifically to mobilize private sector financing for
infrastructure development with creditworthy public entities.
•
The objective of the Alliance between Evensen Dodge International
Inc. (EDII) and the USAID Mission to Mexico (USAID/Mexico) is to
increase Mexican private investment in essential infrastructure by
helping a wider range of public entities improve their access to
financing from Mexican’s capital market.
•
The Alliance between EDII and USAID is directly focused on the
objective of mobilizing large amounts of capital from Mexico’s
financial community for the effective implementation of infrastructure
projects funded with the instruments developed under this program.
Innovative Financing for Urban Infrastructure
•
The Alliance approach leverages public sector resources to mobilizing
private investment in urban infrastructure.
•
The Alliance is attracting Mexican institutional investors to urban
infrastructure.
•
The Alliance is developing long-term debt financing and PPP
structures where each is most appropriate.
•
The Alliance adapts proven world class financing models, legal and
institutional frameworks for use in Mexico.
The fundamental changes in infrastructure
financing introduced in the
Mexican context:
2000 – 2013
(Graphic Overview)
-
Linking Entities to the Market
Mobilizing Capital
Linking Entities to Funding
FINANCIAL MARKETS
ENTITIES
PUBLIC ENTITIES
 NATIONAL
EDI-USAID
Alliance
BANKS
 MULTILATERAL
 PROVINCIAL / STATES
 DEVELOPMENT
 LOCAL
 COMMERCIAL
PUBLIC-PRIVATE CORPORATIONS
 UTILITIES
 BOT, PPP, BOO
PRIVATE – NON GOV’T
ORGANIZATIONS
 PROVIDING PUBLIC SERVICE
 SMALL-MEDIUM SIZE FIRMS
INSTITUTIONAL INVESTORS
LINKS PARTIES
TOGETHER
 PENSION FUNDS
 INSURANCE CO.’s
 MUTUAL FUNDS
CORPORATE INVESTORS
PRIVATE CAPITAL FUNDS
FINANCIAL MARKETS OVERVIEW
EVENSEN DODGE
COORDINATES FINANCIAL PROGRAM
INVESTORS
PUBLIC ENTITY
REQUEST
FUNDING
DEBT OR
EQUITY
ISSUANCE
PENSION
FUNDS
INSURANCE
COMPANIES
REVENUE
FLOWS
LEGAL
FRAMEWORK
CREDIT
ENHANCEMENT
OTHER
INVESTORS
PRIVATE CAP
FUNDS
PPP or SPV
PARAMETERS
BANK
LOAN
TRUST
RATING
AGENCIES
FINANCING
BANKS
FINANCIAL MARKETS OVERVIEW
CASE STUDY: MEXICO YEAR 2000
FINANCIAL ADVISOR
INVESTORS
PUBLIC
REQUEST
FINANCING
ENTITY
DEBT
ISSUANCE
PENSION
FUNDS
BANK
LOAN
REVENUE
FLOWS
LOCAL
TAXES
CREDIT
ENHANCEMENT
LEGAL
FRAMEWORK
FINANCIAL
VEHICLE
TAXES
TRUSTS
RATING
AGENCIES
LONG TERM
FINANCING
INSURANCE
COMPANIES
OTHER
INVESTORS
PRIVATE CAP
FUNDS
TAX
INCENTIVES
BANKS
FINANCING
FINANCIAL MARKETS OVERVIEW
CASE STUDY: MEXICO YEAR 2002
FINANCIAL ADVISOR
INVESTORS
PUBLIC
ENTITY
GOV’T
UNIT
OR PPP
REQUEST
FINANCING
DEBT
ISSUANCE
PENSION
FUNDS
BANK
LOAN
REVENUE
FLOWS
LOCAL
TAXES
CREDIT
ENHANCEMENT
LEGAL
FRAMEWORK
FINANCIAL
VEHICLE
PLAN
TAXES
TRUSTS
RATING
AGENCIES
LONG
TERM
FINANCIAL
FINANCING
LONG
TERM
INSURANCE
COMPANIES
OTHER
CORPORATE
INVESTORS
PRIVATE
CAP
INDIVIDUAL
FUNDS
INVESTORS
TAX
INCENTIVES
BANKS
FINANCING
The impact of introducing pooled financing
for Mexican urban infrastructure
A) The Bond Bank financial model
B) Micro level impact: Example transactions
C) Macro level impact: Changes in the volume of long term domestic financing for infrastructure
since 2000
Changing the Financing paradigm for Urban
Infrastructure in Mexico
Changed the standard mechanism for the conduct of public finance in Mexico.
The Alliance has assisted in introducing an innovative master trust structure
for use by Mexican local government entities. This trust has become the
finance industry standard in Mexico since it was implemented in 2002.
Built efficient SPVs to foster mobilization of capital for development. The
Alliance introduced innovative pooled-financing structures to Mexico with
strong positive reaction from rating agencies and private lenders, as
demonstrated by high credit ratings and record-low total interest cost and
borrowing costs. The SPVs linked over 170 local government entities to the
domestic capital markets. This solution has also become the finance industry
standard in Mexico for pooled-financing transactions for local government
entities in Mexico.
On-going innovation. The Alliance is continuing to apply its innovative model to
develop mechanisms to attract private investment and to finance projects that
will generate new jobs, improve the environment, and strengthen social
services in to Mexican border cities and states to support economic growth
and development of strong and resilient communities.
BOND BANK MODEL
Mexican Subnational Bond Bank
Bond Bank
•
Governance: Public or Private
Mexican Corporation
•
Provides Advice and Financing
State
Government
Local
Gov’t
Other
Entities
Public
Corp
Bond Bank provides
PPPs
The Pooled Financing Model
• Pooled financing combines the financing needs of several (or even many)
public entities, such as municipalities or utilities, into a single financing
transaction to achieve the best possible terms for all participating entities.
• Evensen Dodge pioneered this form of financing in the U.S. through the
development of bond banks in several states.
• The entities that access financing through a bond bank are usually relatively
small and have financing requirements that are too small to attract the local
capital market on their own.
• By participating in a bond bank pooled financing transaction, such entities
gain the following benefits:
They will not necessarily require credit ratings
They will not require collateral from the national government
They will have access to financing at a lower cost and for a longer term
They will receive legal and financial advice from the bond bank
They will achieve economies of scale from the pooled financing process
BOND BANK MODEL
PROCEDURE FOR OBTAINING AUTHORIZATION
PUBLIC
ENTITIES
Process
Application to
participate in
next transaction
BOND BANK
Financial
Markets
State
Congress
Invites entities to
participate in
transaction
Application
Reviewed
With EDI, Provides
technical
assistance to cities
to develop required
legal and financial
documentation
obtains
authorizations
from Governing
Body
Packages up
individual or pooled
financing
documentation
Congress
Authorizes
BOND BANK MODEL
PROCEDURE FOR OBTAINING FINANCING
PUBLIC
ENTITIY
BOND BANK
Given the
authorization from
Congress
Negotiates with
service providers
to reduce costs of
financing
Each Entity
establishes
financing
agreement with
Bond Bank
Each Entity
receives financing
from the Bond
Bank
Bond Bank enabled
to irrevocably
receive revenue
streams from
Entities to pay for
financing
Receives
Financing to
Develop
infrastructure
Financial
Markets
Service
Providers
Bond bank
accesses
financing from
investors and
financial
institutions
FINANCING
BECOMES
AVAILABLE
PAYS FEES TO
SERVICE
PROVIDERS
BOND BANK MODEL
PROCEDURE FOR REPAYING DEBT OBLIGATIONS
PUBLIC
ENTITES
BOND BANK
TRUST
Percentage of
National tax
Transfers,
Local
Taxes
Or
Fees
$
%
BOND BANK
FINANCIAL
MARKETS
• Bookkeeping
• Supervision &
Assessment
IRREVOCABLE
TRUST
Intercepts revenue
streams
Creates Reserve
Accounts and
pays for SPV
operation
IRREVOCABLE
PAYING
MECHANISM
Pays for debt
obligations
Investors get their
money promptly
Pooled Financing Model Summary
• A bond bank is a pooled financing vehicle structured to provide certainty and
transparency to the entities and investors participating in the pooled financial
operations it implements.
• The financial vehicle could be a corporation, non-governmental organization,
public organization or master trust fund.
• Bond banks typically also provide advisory services to municipalities and
local utilities participating in the pooled financing.
• The bond bank establishes a Transactional Trust account to implement each
pooled financing operation; it should implement at least one per year. The
model averts credit risk for each transaction and provides the legal and
procedural soundness that investors and/or creditors require to finance
larger volumes of money at lower cost and longer terms.
• Examples of Evensen Dodge services to a long term client follows: The
State Bond Bank of the State of Hidalgo and the State Bond bank of
Quintana Roo
Micro Impact: The Hidalgo State Bond Bank
and its pooled financing transactions
The State Bond Bank of the State of Hidalgo
• The Mexican State of Hidalgo selected Evensen Dodge International to
develop the first bond bank to execute pooled financing in Mexico. The
bond bank received a AAA.mx rating (the state’s stand-alone rating is A).
The Bond Bank issued US$240 million equivalent in refinancing bonds on
May 10th, 2007, which were over-subscribed and sold at a record rate of
Mexican prime plus 14 basis points for a term of just over 12 years. The
refinancing saved the state millions of dollars and has given it needed
room for future borrowing for infrastructure.
• In May 2010, the Bond Bank borrowed US$40 million equivalent on behalf
of 60 of the state’s 84 municipalities; this enabled these entities to access
long-term financing at competitive market rates at a fixed rate of 7.2%
(record low for transactions involving municipalities). This transaction is
unique because it served very small and poor municipalities some of
which had never gotten a loan before in history.
Micro Impact: The Hidalgo State Bond Bank
and its pooled financing transactions
The State Bond Bank of the State of Hidalgo (continues)
• In March 2012, the Bond Bank borrowed approximately US$200 million
equivalent on behalf of the State Government and 20 of the state’s 84
municipalities; the transaction included a state refinancing for land
purchased for a new oil refinery (to be built by the federal government), and
new money for a state administrative complex. In addition, this transaction
included roughly 20 underlying municipalities borrowing to make green
improvements to their public lighting systems. The transaction closed at
Mexican prime plus 95 basis points for a term of 15 years. The transaction
saved the state millions of dollars and empowered the municipalities with a
record-low cost financing for municipal infrastructure.
Micro Impact: Quintana Roo Pooled Financing
for Water and Sewer Infrastructure
State of Quintana Roo Water and Sewer Pooled Financing
• In October 2007, the state water and sewer utilities corporation (CAPA) accessed financing
through a pooled financing transaction structured by Evensen Dodge International.
• One of the state’s priorities was to provide maintenance and to expand its water and sewer
infrastructure to satisfy the growing demands of the population. CAPA, a public-private
corporation, pooled the financing requirements of several small municipalities to
access domestic currency in an amount equivalent to $30 million dollars.
• The Federal Government matched this with another $30 million. Financing was in the form
of a bank loan from Citi-Bank.
• The credit rating achieved was of AA.mx from FitchRatings and Moody’s. The interest rate
benchmarked prime +19bps. For water and sewer infrastructure in Mexico the standard
had been a spread of +500 to +800 bps if any financing was available at all. Term was 15
years with grace of 2 in principal payment.
Micro Impact: Quintana Roo Pooled Financing
for Water and Sewer Infrastructure
State of Quintana Roo Water and Sewer Pooled Financing
• The financing transaction that the Quintana Roo water utilities corporation
(CAPA) undertook in October 2007 is a model for capital mobilization.
• It swapped low credit rated revenue streams with high rated ones, achieving
the best financing conditions possible in the debt markets.
• No external partial credit guarantees were required.
• New drinking water infrastructure benefited 77,012 inhabitants.
• New sewer and sanitation infrastructure benefited 146,879 inhabitants.
Tlaxcala
Campeche
Queretaro
Baja California Sur
Yucatan
Colima
Aguascalientes
Guerrero
Tabasco
Hidalgo
San Luis Potosi
Morelos
Tamaulipas
Oaxaca
Durango
Zacatecas
Nayarit
Sinaloa
Guanajuato
Puebla
Baja California
Chiapas
Michoacan
Sonora
Quintana Roo
Chihuahua
Jalisco
Coahuila
Mexico
Veracruz
Nuevo Leon
Distrito Federal
PUBLIC FINANCE STATISTICS
STATE DEBT, AT DEC 2013 (MILLIONS OF PESOS)
$70,000.00
$60,000.00
$50,000.00
$40,000.00
$30,000.00
$20,000.00
$10,000.00
$-
Tlaxcala
Campeche
Colima
Tabasco
Queretaro
Yucatan
Tamaulipas
Guerrero
Oaxaca
Hidalgo
Puebla
Guanajuato
San Luis Potosi
Mexico
Sinaloa
Aguascalientes
Morelos
Baja California Sur
Durango
Zacatecas
Jalisco
Baja California
Michoacan
Distrito Federal
Nayarit
Sonora
Chiapas
Veracruz
Coahuila
Nuevo Leon
Quintana Roo
Chihuahua
Estadísticas de las finanzas públicas en los estados
800%
STATE DEBT / TAX TRANSFRS, AT DEC 2013 (%)
700%
600%
500%
400%
300%
200%
100%
0%
Estadísticas de las finanzas públicas en los estados
STATE DEBT AVERAGE DEBT COST, AT DEC 2013 (INTEREST RATE)
7.50%
7.00%
6.50%
6.00%
5.50%
5.00%
4.50%
Macro Impact of the EDII-USAID Alliance in
Mexico
The U.S. Agency for International Development (USAID) reported that Evensen Dodge
International work has resulted in significant contributions to the field of local
government finance in Mexico:
Benefitted over 10 million citizens. The Alliance has directly benefited over 10 million Mexican
citizens by improving their living conditions, some of which were below the poverty line level,
with funding for schools, roads, energy efficient programs, prisons, interior ports to foster
commerce and manufacturing production, health clinics, natural disaster reconstruction,
housing, and water and sewer facilities among other major infrastructure programs in different
states in the Mexico.
Mobilized over $40 Billion. The local government implementing partners participating in the
Alliance have mobilized over $2.0 Billion from Mexico’s domestic capital markets to finance their
infrastructure projects while drastically reducing borrowing costs. Mexican states and
municipalities have replicated the models developed by this Alliance to mobilize over $40
Billion dollars of well-structured sound financing, all in domestic currency, with Mexican
financial institutions and investors.
Trained and built the capacity of more than 1,000 public officials and private sector professionals
Macro Impact of the EDII-USAID Alliance in
Mexico
 Mobilizing domestic credit to build basic infrastructure projects that will
benefit more people, especially urban poor,
 Lowering costs of issuance to encourage more sovereign and subnational entities to seek capital markets financing because of real
savings opportunities,
 Providing country investors with more transparency elements to
become increasingly comfortable with sector and sub-national financial
operations and
 Conducting Capital Markets activities to encourage stronger financial
reporting standards
Thank You
Mobilizing Private Financing:
The Capital Market Story of Mexico
Fernando Gama, Senior Vice President
Evensen Dodge International
EVENSENDODGE@DODGEGLOBAL.COM