ICA closed the Ps9.7 billion ($709 million) financing for the Sarre and Papagos prison PPPs in Mexico on 28 September. The deal breaks down into a Ps7.1 billion non-recourse certificados bursatiles bond issue and Ps2.6 billion in equity. It is the first entirely commercially financed greenfield social infrastructure concession in the country.

The construction plus 22-year build-operate-transfer concession includes two 2,500-inmate facilities in Jalisco and Sonora states. Mexico’s federal Secretaría de Seguridad Pública (SSP) awarded the Sarre and Papagos projects to ICA as part of a closed tender for 12 detention centres in December 2010. The grantor awarded nine of facilities with the remaining seven going to local construction companies. The concessions are the first detention centres for ICA.

The 20.8-year bond issue is split pari passu between a Ps5.323 billion tranche that carries an all-in fixed interest rate of 10.1% and a UDI-denominated Ps1.777 billion tranche that carries an all-in real fixed rate of 5.65%. The average all-in real cost of the debt is 6.15%. Proceeds of the issue are split almost equally between the project companies, Sarre Infrastructura y Servicios and Papagos Servicios para la Infrastructura. HSBC, as left lead, BBVA Bancomer and Banco Santander managed the sale and Deutsche Bank is trustee. The bonds were sold to second-tier Mexican pension funds, or afores, which do not include those managed by Banamex and Inbursa.

ICA originally planned a Ps8.3 billion bond issue. Volatile market conditions in September forced the sponsor to shrink the deal size to maintain a favourable internal rate of return from the concession. It increased its equity contribution to Ps2.6 billion from Ps1.7 billion to make up for the difference. The sponsor plans to raise about Ps1.4 billion in subordinated debt for the concessions, to repay this equity and increase leverage, by January 2012.

Investors were willing to buy the debt because it benefits from a sovereign-guaranteed payment stream. SSP will make monthly availability payments to the concessionaire under a provision of services contract (CPS), which is a priority budget allocation of the Mexican federal government, through a trust structure. The contract is structured so the minimum payment will always be equal to at least debt service, even in the event of penalties against the concessionaire for construction delays or a failure to meet service requirements. The grantor will pay off the outstanding debt if there is an early termination of the concession. The trust guarantees that these payments will be put towards the bonds first before operations and maintenance costs or paying a dividend to the sponsor.

The average debt service coverage ratio is 1.5x and the minimum DSCR is 1.3x, according to Standard & Poor’s (S&P). Fitch Ratings puts the average DSCR at 1.75x and minimum at 1.4x. Both agencies rated the bonds AAA (local).

The CPS contract and trust structure made the bonds possible. The sponsor took advantage of the sovereign-guaranteed payment structure to use a local issue instead of the commercial and development bank loans that are common for concessions in Mexico. Banobras, Mexico’s national development bank, and other commercial banks participated in contract negotiations with the grantor and the decision to use a bond issue came as to a surprise to some of these lenders.

Mexican bondholders remain wary of construction and operational risk. Various sources in the market say that the afores were only willing to subscribe to the Sarre and Papagos issue because it lacked any performance risk. In addition, the funds prefer projects with a local sponsor, for example ICA or Ideal. They add that they doubt it could be repeated for another greenfield deal where payments are not guaranteed by the government. Bond solutions remain possible for existing concessions, especially toll road refinancings where ample traffic history is available.

ICA bid on the contracts for the Sarre and Papagos facilities through an invitation-only tender process with SSP beginning in the first quarter of 2010. The sponsor provided a list of potential sites for the prisons to the grantor, which selected and awarded two as Sarre and Papagos that December. The two structured the concession around a maximum annual fixed payment that the SSP stipulated at the beginning of the contract negotiations. Financial close had to be achieved by 30 September.

The sponsor will build, operate and maintain the two facilities. It will issue a standby letter of credit worth 5% of the value of the construction contract as security during the period. It expects to subcontract O&M services, such as laundry and food. The SSP will be responsible for all inmates held in the centres. ■

Proyectos de Infraestructura Social de ICA
Status: Closed 28 September
Size: Ps9.7 billion ($709 million)
Location: Jalisco and Sonora states, Mexico
Description: Two 22-year detention centre concessions
Grantor: Secretaría de Seguridad Pública (SSP)
Sponsor: ICA
Equity: Ps2.6 billion
Bonds: Ps7.1 billion
Underwriters: BBVA Bancomer, Banco Santander and HSBC
Trustee: Deutsche Bank
Financial advisers: LatAm Capital Advisers
Legal counsel: Galicia (sponsor), Ritch Mueller (lenders)
Independent engineer: R&Q Ingeniería