Financing – Mobilizing Finance for Adaptation in the Water Sector
Mobilizing Private Financing: The Capital Market Story of Mexico May 2014.
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Transcript of Mobilizing Private Financing: The Capital Market Story of Mexico May 2014.
Mobilizing Private Financing: The Capital Market Story of Mexico
a) The fundamental changes in infrastructure financing introduced in the Mexican context: 2000 – 2013
b) The financial model for pooled financing through bond banks in Mexico
c) The impact of pooled financing for Mexican urban infrastructure
i) Micro level: Example transactions.
ii) Macro level: Changes in the volume of long term domestic financing for infrastructure since 2000
Content
Evensen Dodge founded in 1922, was the first independent financial advisory firm in the US.
Participated in developing the US subnational (municipal) bond market.
Has assisted over 1000 subnational organizations access financing over $200 billion.
Is working internationally with USAID as Evensen Dodge International.
In Mexico mobilized $2 billion with USAID GDA Program
Evensen Dodge is a historic firm
Background
• In March 2002, USAID/Mexico and Evensen Dodge International Inc. (EDII), a global public finance advisory firm, entered into cooperative agreement and in 2005 into Global Development Alliance partnership.
• Through a Global Development Alliance, USAID and Evensen Dodge International are pursuing sustainable financing strategies, specifically to mobilize private sector financing for infrastructure development with creditworthy public entities.
• The objective of the Alliance between Evensen Dodge International Inc. (EDII) and the USAID Mission to Mexico (USAID/Mexico) is to increase Mexican private investment in essential infrastructure by helping a wider range of public entities improve their access to financing from Mexican’s capital market.
• The Alliance between EDII and USAID is directly focused on the objective of mobilizing large amounts of capital from Mexico’s financial community for the effective implementation of infrastructure projects funded with the instruments developed under this program.
Global Development Alliance Objective
• The Alliance approach leverages public sector resources to mobilizing private investment in urban infrastructure.
• The Alliance is attracting Mexican institutional investors to urban infrastructure.
• The Alliance is developing long-term debt financing and PPP structures where each is most appropriate.
• The Alliance adapts proven world class financing models, legal and institutional frameworks for use in Mexico.
Innovative Financing for Urban Infrastructure
The fundamental changes in infrastructure financing introduced in the
Mexican context: 2000 – 2013
(Graphic Overview)
- Linking Entities to the Market- Mobilizing Capital
Linking Entities to FundingFINANCIAL MARKETS
INSTITUTIONAL INVESTORS
PENSION FUNDS
PRIVATE CAPITAL FUNDS
BANKS
CORPORATE INVESTORS
MUTUAL FUNDS
INSURANCE CO.’s
DEVELOPMENT
MULTILATERAL
COMMERCIAL
ENTITIES
PUBLIC ENTITIES
PUBLIC-PRIVATE CORPORATIONS
PRIVATE – NON GOV’T ORGANIZATIONS
PROVIDING PUBLIC SERVICE
SMALL-MEDIUM SIZE FIRMS
UTILITIES
BOT, PPP, BOO
NATIONAL
PROVINCIAL / STATES
LOCAL
EDI-USAID Alliance
LINKS PARTIESTOGETHER
PPP or SPV
EVENSEN DODGECOORDINATES FINANCIAL PROGRAM
REQUEST FUNDING
INVESTORS
PUBLIC ENTITY
TRUST FINANCINGTRUST
LEGALFRAME-WORK
PARA-METERS
REVENUE FLOWS
RATING AGENCIES
BANK LOANCREDIT
ENHANCEMENT
FINANCIAL MARKETS OVERVIEW
PENSION FUNDS
INSURANCE COMPANIES
PRIVATE CAP FUNDS
DEBT OR EQUITY
ISSUANCE
BANKS
OTHER INVESTORS
FINANCIALVEHICLE
CREDITENHANCEMENT
FINANCIAL ADVISOR
REQUEST FINANCING
PUBLIC
ENTITY
LONG TERM FINANCING
TAXINCENTIVES
TRUSTS FINANCINGTRUSTSTAXES
REVENUE FLOWS LEGAL
FRAME-WORK
RATING AGENCIES
LOCALTAXES
FINANCIAL MARKETS OVERVIEWCASE STUDY: MEXICO YEAR 2000
INVESTORS
PENSION FUNDS
INSURANCE COMPANIES
PRIVATE CAP FUNDS
BANKS
OTHER INVESTORS
BANK LOAN
DEBT ISSUANCE
FINANCIALPLAN
CREDITENHANCEMENT
FINANCIAL ADVISOR
REQUEST FINANCING
GOV’T UNIT OR PPP
FINANCIALLONG TERM
TAXINCENTIVES
TRUSTS FINANCINGTRUSTSTAXES
REVENUE FLOWS LEGAL
FRAME-WORK
RATING AGENCIES
LOCALTAXES
INVESTORS
PENSION FUNDS
INSURANCE COMPANIES
INDIVIDUAL INVESTORS
BANKS
CORPORATE INVESTORS
BANK LOAN
DEBT ISSUANCE
FINANCIALVEHICLE
CREDITENHANCEMENT
FINANCIAL ADVISOR
REQUEST FINANCING
PUBLIC ENTITY
LONG TERM FINANCING
TRUSTS FINANCINGTRUSTSTAXES
REVENUE FLOWS LEGAL
FRAME-WORK
RATING AGENCIES
LOCALTAXES
INVESTORS
PENSION FUNDS
INSURANCE COMPANIES
PRIVATE CAP FUNDS
BANKS
OTHER INVESTORS
BANK LOAN
DEBT ISSUANCE
FINANCIAL MARKETS OVERVIEWCASE STUDY: MEXICO YEAR 2002
The impact of introducing pooled financing for Mexican urban infrastructure
A) The Bond Bank financial model
B) Micro level impact: Example transactions
C) Macro level impact: Changes in the volume of long term domestic financing for infrastructure since 2000
Changed the standard mechanism for the conduct of public finance in Mexico. The Alliance has assisted in introducing an innovative master trust structure for use by Mexican local government entities. This trust has become the finance industry standard in Mexico since it was implemented in 2002. Built efficient SPVs to foster mobilization of capital for development. The Alliance introduced innovative pooled-financing structures to Mexico with strong positive reaction from rating agencies and private lenders, as demonstrated by high credit ratings and record-low total interest cost and borrowing costs. The SPVs linked over 170 local government entities to the domestic capital markets. This solution has also become the finance industry standard in Mexico for pooled-financing transactions for local government entities in Mexico. On-going innovation. The Alliance is continuing to apply its innovative model to develop mechanisms to attract private investment and to finance projects that will generate new jobs, improve the environment, and strengthen social services in to Mexican border cities and states to support economic growth and development of strong and resilient communities.
Changing the Financing paradigm for Urban Infrastructure in Mexico
Mexican Subnational Bond Bank
State Government
LocalGov’t
PPPs
OtherEntities
PublicCorp
• Governance: Public or Private Mexican Corporation
• Provides Advice and Financing
BOND BANK MODEL
Bond Bank
Bond Bank provides
• Pooled financing combines the financing needs of several (or even many) public entities, such as municipalities or utilities, into a single financing transaction to achieve the best possible terms for all participating entities.
• Evensen Dodge pioneered this form of financing in the U.S. through the development of bond banks in several states.
• The entities that access financing through a bond bank are usually relatively small and have financing requirements that are too small to attract the local capital market on their own.
• By participating in a bond bank pooled financing transaction, such entities gain the following benefits:
They will not necessarily require credit ratingsThey will not require collateral from the national governmentThey will have access to financing at a lower cost and for a longer term They will receive legal and financial advice from the bond bankThey will achieve economies of scale from the pooled financing process
The Pooled Financing Model
PUBLIC ENTITIES
BOND BANK Financial Markets
State Congress
BOND BANK MODELPROCEDURE FOR OBTAINING AUTHORIZATION
Process Application to participate in
next transaction
With EDI, Provides technical
assistance to cities to develop required legal and financial
documentation
obtains authorizations
from Governing Body
Packages up individual or pooled
financing documentation
Application Reviewed
Invites entities to participate in transaction
Congress Authorizes
Given the authorization from
Congress
Bond Bank enabled to irrevocably
receive revenue streams from
Entities to pay for financing
FINANCING BECOMES AVAILABLE
ReceivesFinancing to
Develop infrastructure
PAYS FEES TO SERVICE
PROVIDERS
BOND BANK MODELPROCEDURE FOR OBTAINING FINANCING
PUBLIC ENTITIY
Financial Markets
Each Entity establishes financing
agreement with Bond Bank
Service Providers
BOND BANK
Bond bank accesses financing from investors and financial institutions
Negotiates with service providers to reduce costs
of financing
Each Entity receives financing
from the Bond Bank
BOND BANK FINANCIALMARKETS
Percentage ofNational tax
Transfers,Local Taxes
OrFees
$
%
• Bookkeeping
• Supervision & Assessment
IRREVOCABLE TRUST
Intercepts revenue streams
Creates Reserve Accounts and pays for SPV
operation
Pays for debt obligations
Investors get their money promptly
IRREVOCABLEPAYING
MECHANISM
BOND BANK MODELPROCEDURE FOR REPAYING DEBT OBLIGATIONS
BOND BANK TRUST
PUBLIC ENTITES
• A bond bank is a pooled financing vehicle structured to provide certainty and transparency to the entities and investors participating in the pooled financial operations it implements.
• The financial vehicle could be a corporation, non-governmental organization, public organization or master trust fund.
• Bond banks typically also provide advisory services to municipalities and local utilities participating in the pooled financing.
• The bond bank establishes a Transactional Trust account to implement each pooled financing operation; it should implement at least one per year. The model averts credit risk for each transaction and provides the legal and procedural soundness that investors and/or creditors require to finance larger volumes of money at lower cost and longer terms.
• Examples of Evensen Dodge services to a long term client follows: The State Bond Bank of the State of Hidalgo and the State Bond bank of Quintana Roo
Pooled Financing Model Summary
The State Bond Bank of the State of Hidalgo • The Mexican State of Hidalgo selected Evensen Dodge International to
develop the first bond bank to execute pooled financing in Mexico. The bond bank received a AAA.mx rating (the state’s stand-alone rating is A). The Bond Bank issued US$240 million equivalent in refinancing bonds on May 10th, 2007, which were over-subscribed and sold at a record rate of Mexican prime plus 14 basis points for a term of just over 12 years. The refinancing saved the state millions of dollars and has given it needed room for future borrowing for infrastructure.
• In May 2010, the Bond Bank borrowed US$40 million equivalent on behalf of 60 of the state’s 84 municipalities; this enabled these entities to access long-term financing at competitive market rates at a fixed rate of 7.2% (record low for transactions involving municipalities). This transaction is unique because it served very small and poor municipalities some of which had never gotten a loan before in history.
Micro Impact: The Hidalgo State Bond Bank and its pooled financing transactions
The State Bond Bank of the State of Hidalgo (continues) • In March 2012, the Bond Bank borrowed approximately US$200 million
equivalent on behalf of the State Government and 20 of the state’s 84 municipalities; the transaction included a state refinancing for land purchased for a new oil refinery (to be built by the federal government), and new money for a state administrative complex. In addition, this transaction included roughly 20 underlying municipalities borrowing to make green improvements to their public lighting systems. The transaction closed at Mexican prime plus 95 basis points for a term of 15 years. The transaction saved the state millions of dollars and empowered the municipalities with a record-low cost financing for municipal infrastructure.
Micro Impact: The Hidalgo State Bond Bank and its pooled financing transactions
State of Quintana Roo Water and Sewer Pooled Financing • In October 2007, the state water and sewer utilities corporation (CAPA) accessed financing
through a pooled financing transaction structured by Evensen Dodge International.
• One of the state’s priorities was to provide maintenance and to expand its water and sewer infrastructure to satisfy the growing demands of the population. CAPA, a public-private corporation, pooled the financing requirements of several small municipalities to access domestic currency in an amount equivalent to $30 million dollars.
• The Federal Government matched this with another $30 million. Financing was in the form of a bank loan from Citi-Bank.
• The credit rating achieved was of AA.mx from FitchRatings and Moody’s. The interest rate benchmarked prime +19bps. For water and sewer infrastructure in Mexico the standard had been a spread of +500 to +800 bps if any financing was available at all. Term was 15 years with grace of 2 in principal payment.
Micro Impact: Quintana Roo Pooled Financing for Water and Sewer Infrastructure
State of Quintana Roo Water and Sewer Pooled Financing • The financing transaction that the Quintana Roo water utilities corporation
(CAPA) undertook in October 2007 is a model for capital mobilization.
• It swapped low credit rated revenue streams with high rated ones, achieving the best financing conditions possible in the debt markets.
• No external partial credit guarantees were required.
• New drinking water infrastructure benefited 77,012 inhabitants.
• New sewer and sanitation infrastructure benefited 146,879 inhabitants.
Micro Impact: Quintana Roo Pooled Financing for Water and Sewer Infrastructure
PUBLIC FINANCE STATISTICS
Dis
trit
o Fe
dera
l
Nue
vo L
eon
Ver
acru
z
Mex
ico
Coa
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a
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ua
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ntan
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oo
Sono
ra
Mic
hoac
an
Chi
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Baj
a C
alif
orni
a
Pueb
la
Gua
naju
ato
Sina
loa
Nay
arit
Zac
atec
as
Dur
ango
Oax
aca
Tam
auli
pas
Mor
elos
San
Lui
s Po
tosi
Hid
algo
Tab
asco
Gue
rrer
o
Agu
asca
lien
tes
Col
ima
Yuc
atan
Baj
a C
alif
orni
a Su
r
Que
reta
ro
Cam
pech
e
Tla
xcal
a
$-
$10,000.00
$20,000.00
$30,000.00
$40,000.00
$50,000.00
$60,000.00
$70,000.00
STATE DEBT, AT DEC 2013 (MILLIONS OF PESOS)
Estadísticas de las finanzas públicas en los estadosC
hihu
ahua
Qui
ntan
a R
oo
Nue
vo L
eon
Coa
huil
a
Ver
acru
z
Chi
apas
Sono
ra
Nay
arit
Dis
trit
o Fe
dera
l
Mic
hoac
an
Baj
a C
alif
orni
a
Jali
sco
Zac
atec
as
Dur
ango
Baj
a C
alif
orni
a Su
r
Mor
elos
Agu
asca
lien
tes
Sina
loa
Mex
ico
San
Lui
s Po
tosi
Gua
naju
ato
Pueb
la
Hid
algo
Oax
aca
Gue
rrer
o
Tam
auli
pas
Yuc
atan
Que
reta
ro
Tab
asco
Col
ima
Cam
pech
e
Tla
xcal
a
0%
100%
200%
300%
400%
500%
600%
700%
800%
STATE DEBT / TAX TRANSFRS, AT DEC 2013 (%)
Estadísticas de las finanzas públicas en los estados
Quint
ana R
oo
Tamau
lipas
Tlaxca
la
Sono
ra
Coahu
ila
Nayari
t
Nuevo
Leó
n
Chihu
ahua
Baja C
alifo
rnia
Sina
loa
Méx
ico
Veracru
z
Chiap
as
Distrit
o Fed
eral
Jalis
co
Zacate
cas
Duran
go
Baja C
alifo
rnia
Sur
Tabas
co
Colim
a
Mor
elos
Mich
oacá
n
Guana
juato
Aguas
calie
ntes
Oaxac
a
Guerre
ro
San L
uis P
otos
í
Yucatá
n
Campe
che
Pueb
la
Hidalg
o
Querét
aro4.50%
5.00%
5.50%
6.00%
6.50%
7.00%
7.50%
STATE DEBT AVERAGE DEBT COST, AT DEC 2013 (INTEREST RATE)
The U.S. Agency for International Development (USAID) reported that Evensen Dodge International work has resulted in significant contributions to the field of local government finance in Mexico: Benefitted over 10 million citizens. The Alliance has directly benefited over 10 million Mexican citizens by improving their living conditions, some of which were below the poverty line level, with funding for schools, roads, energy efficient programs, prisons, interior ports to foster commerce and manufacturing production, health clinics, natural disaster reconstruction, housing, and water and sewer facilities among other major infrastructure programs in different states in the Mexico. Mobilized over $40 Billion. The local government implementing partners participating in the Alliance have mobilized over $2.0 Billion from Mexico’s domestic capital markets to finance their infrastructure projects while drastically reducing borrowing costs. Mexican states and municipalities have replicated the models developed by this Alliance to mobilize over $40 Billion dollars of well-structured sound financing, all in domestic currency, with Mexican financial institutions and investors. Trained and built the capacity of more than 1,000 public officials and private sector professionals
Macro Impact of the EDII-USAID Alliance in Mexico
Mobilizing domestic credit to build basic infrastructure projects that will benefit more people, especially urban poor,
Lowering costs of issuance to encourage more sovereign and sub-national entities to seek capital markets financing because of real savings opportunities,
Providing country investors with more transparency elements to become increasingly comfortable with sector and sub-national financial operations and
Conducting Capital Markets activities to encourage stronger financial reporting standards
Macro Impact of the EDII-USAID Alliance in Mexico
Thank You
Fernando Gama, Senior Vice PresidentEvensen Dodge International
Mobilizing Private Financing:The Capital Market Story of Mexico