RCO prices first Mexico toll-road bond since 2006
NEW YORK, May 24 (IFR) - Red de Carreteras de Occidente (RCO) has put to bed a rare international toll-road bond out of Mexico, playing its role in developing a new asset class for corporate peso bonds distributed to both foreigners and locals and creating more complex project structures.
RCO's Ps7.5bn 15-year amortiser is thought to be the first such deal out of Mexico since 2006 when the Autopista Mexico-Toluca toll-road refinanced a Ps4.2bn MBIA-insured 2028 through Nacional Financiera trust. MBIA wraps may have been discredited during the global financial crisis, but bankers are betting that there is a decent pool of demand for global peso deals like this one.
The deal is also another link in the development of what bankers hope will be an increasingly popular asset class after telecom company America Movil and then media firm Televisa proved there is a deep market for broadly distributed blue-chip Mexican pesos transactions.
RCO differed somewhat from America Movil and Televisa as it was sold under 144A/RegS format and was not SEC registered, but otherwise the New York law structure was similar in that it was euroclearable and facilitated buying by both foreign and domestic investors
RCO's placement showed that more complex credits could also be sold under this format, even without broader guarantees from the likes of Mexican development bank Banobras or OPIC in the US.
"It needed some legwork from investors to understand the risks, so this is great news for this new asset class," said a rival banker.
Given the deal's uniqueness, comps were not easy to find, leaving leads leaning largely on the 5.75% secondary yield of America Movil's own 10-year global peso bond and adding a credit premium for the lower-rated deal, as well as a spread for the structure and the extension to the 11.3-year average life.
Testing the waters in the low 9 area, the borrower was able to tightened guidance to 9.125% (plus/minus 12.5bp) and finally price at par to yield 9%, or Mbonos plus 410bp. Orders were heard reaching around Ps9.6bn, according people away from the deal.
Some started with Televisa's new 30-year global peso bond and extrapolated backward to calculate a yield of about 6% yield for a new 10-year from Televisa.
"It looks like 300bp over Televisa," a banker noted.
Other possible pricing benchmarks in the project universe, at least with similar ratings, were Colombian infrastructure utility Emegsa or Mexican wind-farm Oaxaca, but those bonds are denominated in other currencies.
"There isn't going to be a direct comp," the banker said. "With Oaxaca, they had an off-take and it was sold more as CFE risk, and it was in dollars. This is peso and based on projected traffic flows."
Still at 9%, the deal came flat to pricing on a similarly structured Ps2.84bn 15-year that RCO placed in the local market late last year at par to yield 9%, although the spread was wider than the 340bp over Mbonos on that occasion.
With the exception of a Banobras guarantee for 6.5% of the total amount, the local transaction was almost an exact replica of the international deal.
At the RFP stage, there had been talk that the international offering might also require some sort of credit enhancement, such as a guarantee from local development bank Banobras, or from OPIC, but, in the end, it was deemed unnecessary, although rival bankers suggested that the attractive spread over Mbonos was compensation enough.
Toll roads have had a checkered past in Mexico and the government took over many of them in the 1990s, not long after a privatization of the highway system. However, this particular project has shown a resiliency to economic downturns since the early 1990s, and can boast "robust and growing" debt service coverage profiles even under poor scenarios, says Fitch.
The cheap labor costs that allowed transportation companies to take slower side-roads in the past and, hence, reduce traffic is also less of a factor now, while heightened security needs have also encouraged drivers to pay for safer highways, said an investor looking at the trade.
In light of the recent local issue, some bankers were wondering about the strength of the local bid, which was important for some foreign accounts that find comfort in this extra pool of liquidity. Mexican construction firm ICA, which was recently downgraded to B2 and has an ownership stake in RCO alongside Goldman Sachs, had also come up in discussions about the trade.
"It is going to be interesting, with the ownership, the currency and the local market having bought a lot of this financing," said a rival banker. "ICA has a majority shareholding. Will that have an impact?"
The 15-year amortizing bond has a six-year principal grace period and a weighted-average life of 11.3 years. There is a 12-month debt-service account, a five-month reserve account for major maintenance, as well as restrictions of distribution payments whenever the debt service cover ratio is under 1.25x, or if there is an event of default, according to Fitch.
Proceeds are partly going to prepay bank debt. Collateral includes a trust estate, RCO stock held by all shareholders, as well as certain tangible and intangible assets, but not rights under the concession agreement.
The leads were BBVA, Goldman Sachs, HSBC and Morgan Stanley. Ratings are BBB/BBB- (S&P/Fitch).
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