A New Approach to A New Approach to Infrastructure Finance Infrastructure Finance

June 2004 – Washington, DCJune 2004 – Washington, DCJohn Graham, Investment Officer John Graham, Investment Officer Private Sector Department, IDBPrivate Sector Department, IDB

Inter-American Development BankInter-American Development Bank

Private Sector Department of the IDB:• Privatizations, Concessions and Corporate Finance• Capital Markets Operations and Trade Finance

Products:• Long-term Direct Loans (A Loans)• Syndicated Loan Participations (B Loans)• Credit and Partial Risk Guaranty Program

Infrastructure Sectors:• Energy• Transportation• Water and Sanitation• Telecommunications

The Latin American Infrastructure The Latin American Infrastructure MarketMarket

Challenges:• Growing infrastructure deficit in Latin America and the Caribbean • Poor infrastructure constraining regional competitiveness • Sovereign governments facing severe fiscal constraints• Sovereigns increasingly turning to concessions and privatizations• Project finance lenders taking a more cautious approach• Uncertainty regarding global currency movements• Uncertain interest rate environment

Opportunities:• Substantial liquidity in local pension and institutional markets• Governments seeking to tap local savings for infrastructure • Low existing global interest rate environment

Limitations on Hard Currency LendingLimitations on Hard Currency Lending

Difficulties with traditional hard-currency financing:• Natural mismatch for projects generating local currency revenues• Dollar-indexed tariffs often commercially and politically unsustainable• Hedging products often unavailable or prohibitively expensive• Political risk insurance (C & T Risks) not designed to hedge devaluation• Difficult experiences in Latin America during the past decade• Less appetite among traditional project finance lenders for such risks

IDB: Private Sector Guaranty ProgramIDB: Private Sector Guaranty Program

Overview:• Credit enhancements tailored to the unique risk profile of each project• Generating better options in local currency financing• Substantial flexibility in structuring the guaranty

Political Risk Guarantees:• Breach of contract• Currency Convertibility & Transferability (C/T)• Other political risks

Credit Guarantees:• All-risk credit guarantees (credit wraps)• Maturity guarantees

IDB Projects in the MarketplaceIDB Projects in the Marketplace

IDB Guaranty Programs in the Marketplace:Financial Guaranty Programs:• Chile: Costanera Norte Toll Road Project (2003) US$75 million Credit Guaranty

• Colombia: Colpatria Mortgage Bond (2002) US$5.2 million Credit Guarantee

• Chile: Rutas del Pacífico Toll Road Project (2002) US$75.0 million Credit Guarantee

Political Risk Guaranty Programs:• Brasil: Light Electricity Services (2000) US$100.0 million Political Risk Guarantee, Brazil

• Dominican Republic: San Pedro de Macorís Energy Project (2000) US$142.0 million Political Risk Guarantee

• Brasil: VBC Energía - Electricity Services (1999) US$100.0 million Political Risk Guarantee

• Colombia: Río Bogotá Water and Sanitation Project (1997) US$31.3 million Political Risk Guarantee

IDB Participation in Chilean HighwaysIDB Participation in Chilean Highways

Model highway transactions in Chile:

• Highway concessions let by the Ministry of Public Works (MOP)

• Long-term BOT concessions (over 20 years)

• Construction, expansion, improvement and O&M

• Investment of over US$400 million

Rutas delPacífico S.A.

Sociedad Concesionaria

Rútas del Pacífico - Deal of the Year Rútas del Pacífico - Deal of the Year 20022002

Structured Bond Issuance:

Rútas del Pacífico S.A.

UF 11,424,000(approximately US$ 300 million)

Series A UF 1.424,000Series B UF 10,000,000

“AAA” Feller Rate“Aaa” Humphreys

Guarantor

Project Finance Magazine – Latin American Transport Deal of the Year 2002Project Finance International – LATAM Deal of the Year 2002

Rutas delPacífico S.A.

Sociedad Concesionaria

Co-Guarantor

Costanera Norte - Deal of the Year 2003Costanera Norte - Deal of the Year 2003

Structured Bond Issuance:

Costanera Norte S.A.

UF 9.500.000(approximately US$ 256 million)

Series A UF 1.900.000Series B UF 7.600.000

“AAA” Feller Rate“Aaa” Humphreys

Guarantor

Co-Guarantor

Project Finance Magazine – Latin American Transport Deal of the Year 2003Project Finance International – LATAM Deal of the Year 2003

Case Study: Costanera Norte S.A.Case Study: Costanera Norte S.A.

Project Fundamentals:

• Concessionaire led by Impregilo SpA of Italy

• 30-year Concession Contract with the Ministry of Public Works (MOP)

• Construction and O&M of a 42km system

• 7 km of tunnels, 12 bridges, over 30 interchanges

• Operation and Maintenance for 30 years

• 100% electronic tolling system based on TAG y video

• Congestion tolling

• Minimum Revenue Guaranty from the MOP

Case Study: Costanera Norte S.A.Case Study: Costanera Norte S.A.

0

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

6,000,000

7,000,000

8,000,000

9,000,000

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18

20

19

20

20

20

21

20

22

20

23

20

24

IMG SDG Base BSI

Minimum Revenue Guaranty (MRG):

• GOC guarantees a base level of income for 20 years

• Concessionaire obligated to share revenues in excess of projections

• IDB structures bond amortization based on free cash in MRG scenario

• Downside traffic risks allocated to the Government of Chile50/50 Revenue Sharing

Guaranteed Revenue

Level

Case Study: Costanera Norte S.A.Case Study: Costanera Norte S.A.

Opportunities in the Chilean Market:

• High level of liquidity with local pension funds and insurance companies

• Capacity to fund the operations in local currency (Unidad de Fomento)

• Long tenors available in excess of 20 years

• Institutional investors require risk rating of AA/AAA (local scale)

Constraints:

• Greenfield toll road projects cannot reach AAA/Aaa rating

• Large scale of the project requires project finance approach

• Institutional investors unaccustomed to structuring project finance transactions

• Construction, O&M, electronic tolling, greenfield traffic risks

• Environmentally sensitive project

Case Study: Costanera Norte S.A.Case Study: Costanera Norte S.A.

Description of the Guaranty:

• IDB structures the transaction on a “project finance” basis allocating the risks among the project participants

• Acting as “Guarantor of Record,” IDB provides an unconditional and irrevocable “all risk” credit guarantee on the project bonds

• Guarantee covers any shortfall of funds to make payment under the bonds

• IDB guarantees up to US$75 million while syndicating the remaining risks to a private Co-Guarantor (monoline insurance company)

• Credit-enhanced bonds receive the AAA/Aaa rating necessary to achieve placement with local institutional investors

Case Study: Costanera Norte S.A.Case Study: Costanera Norte S.A.

Guaranty Structure for Costanera Norte:

Pension Funds / Insurance CompaniesAssume the credit risk of IDB/Ambac

Pension Funds / Insurance CompaniesAssume the credit risk of IDB/Ambac

Bond Proceeds

Coupon Payments

IDB/Ambac Guaranty• IDB as “Guarantor of Record”

• “Back to Back” Guaranty with Monoline

Full Risk Transfer to the Guarantors

IDB/Ambac Guaranty• IDB as “Guarantor of Record”

• “Back to Back” Guaranty with Monoline

Full Risk Transfer to the Guarantors

US$ Premium Payments

Contingent Support

Case Study: Costanera Norte S.A.Case Study: Costanera Norte S.A.

Results of the Issuance

• Total Project Cost: UF18.6 million (US$520 million)

• Bond Issuance: UF9.5 million (US$256 million)

• IDB/Ambac “wrapped bond” rated AAA/Aaa (local and global scale)

• Series A: coupon rate 5.0%, 12+ years

• Series B: coupon rate 5.5%, 21+ years (lowest bond coupon rate in Chile)

• Bond placement 2.5 times over-subscribed

Case Study: Costanera Norte S.A.Case Study: Costanera Norte S.A.

Conclusions on Costanera Norte:• IDB Credit Guaranty permits borrowers to tap local financing sources• Well-adapted to projects charging tariffs and tolls in local currency• Local currency financing offers natural hedge to FX risks

• Contributes to long-term viability and sustainability

Benefits to Local Capital Markets:

• Wrapped-bonds attract highly-capitalized institutional investors

• Deepens and broadens local capital market by increasing volume of bonds

• Offers AAA-rated portfolio diversification beyond sovereign paper

• Allows countries to invest in their own infrastructure development

IDB Guaranty Program: Next StepsIDB Guaranty Program: Next Steps

New areas of interest:

• Credit Wraps with other private insurers

• Credit Wraps with other Multilateral Agencies (WB, IFC, CAF)

• Mezzanine Guarantees

• Pool Guarantees

• Rolling Guarantees

• Maturity Guarantees (Put Option)

• Corporate Bond issuances

• Future Flows Receivables/Loan receivables

• Support for Credit Intermediaries/On-lending