ICA Lands First Mexican Domestic Project Bond

Two units of ICA have raised MXP7.1bn ($518m) to construct two prisons in what is being called Mexico’s first domestic market project bond. The 20.8-year deal is backed by contracts that ICA’s Sarre and Papagos units have with Mexico’s secretary of public safety to build and operate prison facilities. Bankers on the deal say it is the first time an infrastructure project bond has been completed in Mexico using assets that have yet to be built and that don’t yet generate any revenues. A peso-denominated MXP5.32bn tranche was priced at a fixed rate of 10.1%, while an UDI-denominated MXP1.78bn tranche came at 5.65%. “The key is the contract the issuer has with the government entity,” says a banker on the deal who calls it “debt friendly.” The structure is stronger than most of deals of this kind, carrying provisions to ensure debt payments under a number of potential negative scenarios, a banker says. Funding for such a project would have previously come through the loan market, perhaps with an eventual bond takeout after construction. Although the structure is attractive to infrastructure players and to long-term investors, it remains to be seen whether it can be replicated in other areas such as water projects or toll roads, where operational risk may be more acute. “At the end of the day you are buying a Mexican government warranty,” says another banker on the deal, He adds that the sector is unimportant as long as it has government support, and expects another public service contract securitization in the market within the next year. ICA was aiming for a MXP8.3bn size, but demand fell a bit short, and bankers note that a retap could be in the cards once market volatility subsides. Afores and insurance companies represented most of the buyers. HSBC, Bancomer and Santander managed the sale, rated AAA on a national scale.