Peru’s central bank estimates that traffic congestion in the capital city, Lima, costs the country around $5.4 billion in annual losses – roughly equivalent to 2% of gross domestic product.
Authorities have come up with numerous plans to address this, including setting out to build a six-line Lima Metro as well as a new ring road around the city. But few proposals have been as innovative as a bond issued by the city government to finance road infrastructure projects.
The 1.205 billion soles ($325 million equivalent) local currency bond issued in December 2023 was the city’s first in the international market – and, indeed, the first international bond offering by any local Peruvian government body.
The 10.1% 20-year bond, which wins Subnational Deal of the Year, was issued as part of a 4 billion soles ($1 billion) securitization bond program, backed by the cashflows of real estate and vehicle taxes of the Municipality of Lima. These cashflows were assigned to the trust (Lima Infrastructure Trust) created and controlled by the Municipality of Lima, as originator and guarantor.
“The amount, length of time and the fact that it was in local currency are among the relevant factors that make this bond stand out,” says Melissa Castillo, head of finance for the municipality.
She notes that the securitization of tax revenues via a special trust was the real novelty of the transaction. The use of real estate and vehicle taxes for the program was “important for the market, because we could show the evolution of tax collection, which is 11 times greater today than at the start of the century.”
She adds: “Investors looked favorably at this.”
Jorge Lazo, whose law firm Lazo Abogados advised the Municipality of Lima on the transaction, says the bond was not only important for Lima, but the country in general. While Peru has 196 provincial municipalities and 1,678 district municipalities, Lima is the only municipality in the country to have issued an international bond.
“It was a very important step for Peru and was done with a great deal of creativity, with creation of the trust and securitization of taxes,” Lazo says. “I think it sent a clear message that Peru’s subnational governments can carry out international transactions and that there is interest in the country.”
The proceeds from the bond will be used for several projects, but the bulk will be invested in road long-delayed road projects to alleviate vehicle congestion. One, which will connect a freeway in the city to the Pan-American Highway, has been on the drawing board since the 1980s.
The bond was the first in a financing program planned by Mayor Rafael López Aliaga’s government when he took office in 2021. The plan includes up to 4 billion soles ($1.1 billion) in debt. A follow-on issuance of $337 million was completed last September, as part of a consent solicitation and reopening of the 2043 bonds. Proceeds were also for road infrastructure projects, with a small amount, around $50 million, earmarked to pay off a bank loan.
Castillo says the municipality is continuously monitoring the market to establish when a new bond might be warranted.
“We have room for about $300 million more through the program, but the timing depends on market conditions,” she says.
Underwriter’s Counsel: Cleary Gottlieb; Garrigues
Guarantor’s Counsel: Lazo Abogados; Milbank
Counsel to Issuer & Trustee: A&O Shearman; Rubio Leguía Normand
Sole Global Coordinator & Bookrunner: BofA Securities
Issuer: Credicorp Capital Titularizadora on behalf of Lima Infrastructure Trust
Guarantor: Municipality of Lima
All supporting financial institutions and law firms were transmitted to LatinFinance by the award category winners. For updates please email awards@latinfinance.com