The Difficult Second Album – La Yesca
After scoring a coup with its El Cajón financing for ICA in 2004, WestLB followed with yet another innovative take on hydro financing. A facility structured and syndicated for the La Yesca power generation dam – located in the same river system as its predecessor – is the LatinFinance Best Power Deal.

In popular music, a band’s follow-up to a debut hit is often seen as the true test of greatness. Such is the case with WestLB and ICA, who built on the Pidregas-based financing of El Cajón to secure a new package that was large and very affordable for the sponsor, while at the same time lucrative for the lead arranger.

The main challenges for ICA were to win a mandate by submitting the lowest possible bid, and once it was won, to finance the dam’s construction at lowest possible cost. It did both with tremendous success.

In its pitch, WestLB proposed that the builder segregate the project’s various construction stages, which had significantly different profiles. Initial construction carries high risk because it is a greenfield development with no offtake agreement. However, as ICA achieves construction milestones, it can obtain certificates of completion from CFE, Mexico’s electricity commission. The latter will eventually purchase power generated at La Yesca, which in turn allows ICA to borrow against those certificates at investment grade rates.

Financing for La Yesca was structured to match these two kinds of risk. WestLB created an $80 million revolving disbursement facility that ICA would draw on for its monthly capital requirements in the project, including initial construction of each stage. The bank did not disclose pricing on the bilateral facility, but bankers there at WestLB say they are pleased with the return on that piece, and that it is significantly higher than what the second facility pays.

“Due to our experience with El Cajón, we were in a position to assess this risk better than the other banks [that were pitching for the mandate],” says Jared Brenner, executive director and the banker leading the deal for WestLB. Through close work on El Cajón with ICA, when the sponsor was still emerging from bankruptcy, WestLB claims to have become one of ICA’s go-to advisors for financing matters.

For La Yesca, WestLB advanced a $910 million provisional loan to ICA for the bidding, then syndicated out the risk once the concession was awarded. ICA is using the second facility to pay down what it draws on a $80 million disbursement line.

Pricing on the 4.75-year syndicated portion came at a tight 50 basis points over Libor, well below what many banks are funding themselves today, though in line with other high grade transactions in the market at the time. Senior MLAs include NordLB, BBVA, Citi, HSBC and Santander. Scotia, Banobras, Dexia and Natixis came in as MLAs.

“If you eliminate the construction risk in a transaction, you can price it much cheaper,” says Thomas Friebel, head of syndications for LatAm at WestLB. “ICA is only paying construction risk on an $80 million revolver,” he notes.

There were few, if any, other power deals done during the 12-month period through July in LatAm that compare to La Yesca for scale and financing innovation. In Chile, Ontario Teachers Pension Plan and Morgan Stanley Investment Management, an infrastructure fund, acquired PSEG’s Saesa for $887 million, gaining a strong, long-dated asset in the region.

Also notable in Chile, though just outside the time period under consideration is Nueva Ventanas, a $550 million 241 megawatt power project for AES Gener. It broke new ground for the loan market by achieving low cost of funds with the help of export agency financing.

But La Yesca wins for its ability to problem solve within a classic, competitive auction and concession process, in a country with a large pipeline of infrastructure projects. “You cannot afford not to finance ICA,” says Friebel. LF