Metro de Panamá has sold $618.7 million of senior secured notes backed by an explicit government guarantee to fund the construction of its capital’s proposed second metro line.
The deal marks the first time that a government receivable is securitised and transferred to a special purpose vehicle (SPV) but issued internationally. It’s also the first such securitisation of no-objection certificates (certificados de no objeción or CDNOs) in Panama.
"Metro de Panamá is an entity that is not self-sufficient, most metro projects don’t make money"
A consortium made up of Brazilian conglomerate Odebrecht and Spanish construction company FCC Construcción won the right to develop the $2 billion project, Panama Metro Line 2, in 2015.
The promissory notes, issued by a special issuance vehicle, SPARC, are backed by CDNOs, as payment for each construction milestone completed by the consortium on the second metro line. According to the release, the CDNOs become unconditional and irrevocable payment obligations of Metro de Panamá once they are purchased.
Gianluca Bacchiocchi, partner at magic circle firm Clifford Chance in New York, who represented both the issuer and UBS as initial purchaser, outlined the value of this. “In this structure, during the availability period in which bond proceeds are used to purchase the CDNOs, CDNOs will be paid as well," he said.
- SPARC, a Cayman Islands-incorporated segregated portfolio company (SPC), has issued $618.7 of million senior secured notes to fund the development of a new metro line in Panama City;
- The transaction marks the first such bond securitisation of certificates of no-objection (CDNOs) in Panama, and is the first time that a government receivable has been securitised and transferred to an SPV, but issued internationally;
- The notes were used to partially finance the purchase commitment of CDNOs, which are payment obligations generated by the project itself that allow the consortium to make payments as each construction milestone is achieved;
- This unique structure allows for more efficiency from a negative payment perspective;
- Bookrunner UBS was able to negotiate with the government to obtain a guarantee that if Metro de Panamá failed to pay it would step in and pay within 30 days the amount that it had failed.
One of the key points of this securitisation was that two transactions happened almost simultaneously. SPARC issued the notes, received payments for them and then purchased the receivables from the consortium. In traditional securitisations, bond proceeds are dispersed and then payments are made.
This unique structure allows for more efficiency from a negative payment perspective. This is because it requires fewer bonds, and means the issuer is able to deal with the negative carry by using the proceeds coming in for future purchases.
In this instance, UBS was also able to negotiate with the government to obtain a guarantee that if Metro de Panamá failed to pay it would step in and pay within 30 days the amount that it had not delivered, effectively implementing a sovereign guarantee.
According to Estif Aparicio, partner at Panamanian firm Arias Fábrega & Fábrega who acted as the issuer’s local counsel, the structuring team pushed hard for this implicit guarantee because metro systems in cities the size of Panama tend to operate at a natural loss.
“In the end there was a conclusion that the guarantee was necessary to make this project financeable,” he said. “This is because Metro de Panamá was supposed to pay the receivables and all the bills related to the construction of this project: it is an entity that is not self-sufficient, most metro projects don’t make money.”
As the consortium achieves a milestone, Metro de Panamá - essentially a quasi-governmental entity tasked with owning and operating the metro assets on behalf of Panama City - will issue certificates that oblige them to pay a certain amount on a set date.
“The CDNOs are the risk of Metro de Panamá, and considering the fact that the fares for the metro are subsidised, they rely on the government to provide for a material portion of its budget,” said Bacchiocchi. “It can’t just rely on the Metro to operate itself, it does need to be funded by the government as well.”
UBS was keen to avoid a banking syndicate for this transaction. This may be due to the reported failure of a previous syndicate made up of Citibank, Mizuho, the Bank of Tokyo-Mitsubishi and Deutsche Bank, which was hit by a corruption scandal earlier this year. This is also the first time that a project of this magnitude has been structured using capital markets funding in Panama.Another source that worked on the deal said that Panama and other Latin American countries will now see how successful this transaction was. Because the bonds priced so much better than they could get from just doing a bank deal, it has set a good precedent to show to the market.
“In today’s market everybody is chasing yield and even high yield deals are pricing quite low,” said the source. “If you can structure a deal using capital markets, or structure a concession or public-private partnership contract that can be financed by the capital markets, ultimately that should mean cheaper financing and cheaper project costs for the government.”
The notes broke a lot of new ground in Panama - another innovative aspect was that this was the first deal of this kind to be completed under new risk retention rules implemented September 2016. These stipulate that if the issuer or the sponsor of the project were to sell an asset-backed security, the sponsor would have to retain five percent of the notes that were being issued.
Foreign issuers, however, were exempt from complying with this as long as no more than 10% of the bonds were sold in the first instance to 144(a) investors.
“We relied on that exemption as well,” said Bacchiocchi, “so what was very nice to see about this whole transaction structure was that even though the bank was constrained to only 10% to144a investors, the bond ended up about 3x oversubscribed, so they were able to fully build a book of international investors.” The deal was listing in Singapore to avoid European reporting obligations.