ICAs financing for the Ps9.7 billion ($709 million) Proyectos de Infraestructura Social de ICA detention centre concession is the first fully commercially financed greenfield social infrastructure concession in Mexico. The bond financing, which closed on 28 September 2011, involved institutional investors taking construction risk. It was also the first time that ICA, a civil engineering firm with a long history of road, power and transit projects, has worked on a prison project.

The construction plus 22-year build-operate-transfer concession includes two 2,500-inmate facilities in Jalisco and Sonora states. Mexicos federal Secretaria de Seguridad Pu blica (SSP, or public security ministry) awarded the Sarre and Papagos projects to ICA as part of a closed tender for 12 detention centres in December 2010. The ministry awarded nine of the facilities, with the remaining seven of those nine going to local construction companies.

HSBC, as left lead, BBVA Bancomer and Banco Santander managed the Ps7.1 billion non-recourse certificados bursatiles bond issue. The 20.8-year issue is split between a Ps5.323 billion tranche that carries an all-in fixed interest rate of 10.1% and an UDI-denominated Ps1.777 billion tranche that carries an all-in real fixed rate of 5.65%, with both tranches ranking pari passu. The average all-in real cost of the debt is 6.15%.

The underwriters sold the bonds to second-tier Mexican pension funds, or afores, which do not include those managed by Banamex and Inbursa. The average debt service coverage ratio on the bonds is 1.5x and the minimum DSCR is 1.3x, according to Standard & Poors (S&P). Fitch Ratings puts the average DSCR at 1.7 5x and minimum at 1.4x. Both agencies rated the bonds AAA (local).

Proceeds of the issue are split almost equally between the project companies, Sarre Infrastructura y Servicios and Papagos Servicios para la Infrastructura. 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.

The ministry began the invitation-only tender process for Sarre and Papagos facilities 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 sponsor and grantor 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 and none of the other detention centre financings are known to have closed.

Bonds were a surprising financing choice. Commercial and development bank loans have long been the most common source of financing for concessions in Mexico. Banobras, Mexicos national development bank, and other commercial banks participated in contract negotiations with the grantor. However, a combination of government performance guarantees and the local sponsor made the bond issue possible.

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. The contract is structured so that 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. In addition, the afores prefer projects with a local sponsor, according to local sources familiar with their thinking.

Long-term bond financings for social infrastructure concessions with construction risk in Mexico are repeatable. However, the structure would have to be very similar to Sarre and Papagos and only local firms, such as ICA and Ideal, could realistically bring deals to close.

Gabriel de la Concha, chief investment officer of ICA, said that the sponsor is currently working on a between Ps1 billion and Ps1.2 billion subordinate loan, to back the operations and maintenance component of the concession, with local lenders. It plans to close the additional debt this quarter. We are now looking into the performance of ICA rather than the support of the government. It will be the icing on the cake of the whole detention centres financing, he adds.

Proyectos de Infraestructura Social de ICA
STATUS: Closed 28 September 2011
SIZE: Ps9.7 billion ($709 million)
LOCATION: Jalisco and Sonora states, Mexico
DESCRIPTION: Two 22-year detention centre concessions
GRANTOR: Secretaria de Seguridad Publica (SSP)
SPONSOR: ICA
EQUITY: Ps2.6 billion
DEBT: Ps7.1 billion
UNDERWRITERS: BBVA Bancomer, HSBC and Banco Santander
TRUSTEE: Deutsche Bank
GRANTOR FINANCIAL ADVISER: LatAm Capital Advisers
GRANTOR LEGAL COUNSEL: Galicia
LENDER LEGAL COUNSEL: Ritch Mueller
INDEPENDENT ENGINEER: R&Q Ingenieria
MODEL AUDITOR: Ernst & Young
INSURANCE ADVISER: ICA Risk