Gasoducto Sur Peruano’s significance in the project finance market is clear. The $4.125 billion deal backing the 621-mile pipeline is set to be the largest financing for a greenfield project in Latin America and its execution is expected to be a testament to the deepening bank loan market in a region facing hundreds of billions of dollars of infrastructure mega-projects in the coming decades.

The non-recourse, mini-perm has attracted international lender participation, a target demographic that will also be critical to realizing the region’s infrastructure needs in light of a relatively shallow pool of local banks. SMBC is advising sponsors Odebrecht Latinvest and Spanish gas distributor Enagás, which own 75% and 25%, respectively, of the pipeline. SMBC is among fourteen bookrunners that comprise BBVA, Citi, Crédit Agricole, DNB, ICBC, ING, Spain’s Instituto de Crédito Oficial, Intesa Sanpaolo, Mizuho, MUFG, Natixis, Scotiabank and Société Générale, which have each agreed to make $275 million commitments to the seven-year loan.

LatinFinance spoke to several sources familiar with the details of the financing plans for this article, although all asked not to be identified before the terms of the deal are fixed.

These commitments are likely to be reduced pro-rata if second tier banks – between six to ten institutions — come in as senior mandated lead arrangers with tickets ranging between $125 million and $200 million. These banks would not take underwriting risk and book runners would allot final ticket sizes. The deal will include an interest rate swap for close to 100% of the principal, as well as a hedging instrument. 

A transaction of this size and novelty is likely to be tough in almost any region: corralling 14 book runners around the negotiating table suggests a Herculean task in itself. In addition to lenders, a veritable army of consultants and attorneys have been employed to ensure environmental and social compliance, including Canadian consultant Hatch for engineering, ERM for social and environmental matters, AON for insurance issues and Ernst & Young as financial model auditor. 

The deal has also faced a number of obstacles that are unique and potentially emblematic to project financing in Latin America, providing a learning exercise to prospective investors, lenders and regional governments looking to buoy sliding growth with sweeping infrastructure concessions.

Speed bumps

The consortium had originally aimed to wrap the project financing backing GSP during the first half of 2015, after it garnered a 34-year concession in June 2014 from Peru’s energy and mining ministry through ProInversión, the government agency tasked with promoting business opportunities in the country, including management of tenders for public-private partnerships. The sponsors closed a bridge loan in September 2014, shortly after the concession was awarded, with a group of five banks. BBVA, Intesa Sanpaolo, MUFG, Natixis and SMBC came in on the $600 million 18-month facility. 

The first hurdle lay in the underlying concession agreement, which required substantial time and energy from lenders and sponsors as well as cooperation from the Peruvian government, to make it palatable for bank financing. “Such a large contract should have drawn global companies to the bid, but there were only two in the competition,” says Pablo Secada, chief economist at the Peruvian Institute of Economy (IPE), a think tank. “The contracts are designed in a way that then lead to a lot of contingencies, because the financial schemes were initially archaic, and need a lot of work before presenting it to the market.”

Ideally in project finance, an investment grade counterparty pledges to make regular payments of a certain amount for the project’s product or service over a period of decades, known as an off-take agreement. Peru, however, lacks a single entity large enough to play this role for GSP, which will be able to transport 500 million cubic feet of gas per day. Thus, the government created a complex scheme where GSP delivers gas to the Transportadora de Gas del Perú (TGP) pipeline system, which sells the gas to electricity generators and industrial customers under tariffs. Proceeds from these sales are then put into a trust which ultimately pays back GSP for the gas. 

Sponsors and lenders expect GSP to sign its own capacity shipping contracts in the next five to six years, once it builds an operational record. However, the project’s initial dependence on a completely separate pipeline for cash flows has given banks some pause on the road to getting comfortable with GSP. 

TGP was built in 2004 with a development price tag of roughly $820 million. It operates a little more than 1,000 miles of pipeline connecting the jungle near Cusco through the Andes and to the coast. Enagás, Tecgas Camisea and Sipco Peru Pipelines Corporation are majority shareholders with 24.35%, 23.6% and 21.18% stakes, respectively. 

The high-profile arrest in June of Marcelo Odebrecht, chief executive of the Brazilian conglomerate affiliated with GSP sponsor Odebrecht Latinvest, amid a series of such moves in connection with the Lava Jato corruption scandal, put a more recent obstacle in front of the financing. 

Parties to the transaction reacted quickly. The developers traveled to New York this summer to meet with lenders and clarify the separation between the sponsor in the consortium and the Brazilian parent. Bankers working on the deal say the structure and terms have been tuned to accommodate the circumstances, however the deal will likely close toward the end of this year, instead of mid-2015. The agenda in late August was focused on finishing the due diligence and having the deal ready for bookrunners to present to their internal credit committees and the second tier banks.

Future gains 

GSP provides an opportunity for Peru to improve its trade balance by exporting excess gas from its Camisea fields to neighboring portions of Chile, Ecuador and even Brazil that have limited access to fuel. It also offers a chance for the country to lower its own power pricing, making its exports more competitive. The project’s importance in this regard is helping to deliver the financing over some of these hurdles. 

“The impact from lower electricity prices is no trivial thing. Cheaper energy has been key for Peru achieving competitive indexes and closing in on economies such as Chile or Colombia,” Secada says. “The pipeline could supply gas to more power plants, and Peru would be in position to sell energy to neighboring countries.”

These benefits, combined with positive impacts on the ground has likely incentivized the government to work with lenders on the concession agreement. “This is a megaproject that will transport natural gas from Cusco to the south coast, passing by Arequipa, Moquegua, Tacna and Puno. It will bring clean and affordable energy to low-income families,” Raúl Pérez-Reyes Espejo, Peru’s vice-minister for energy, tells LatinFinance. 

GSP will strengthen Peru’s energy security and decentralize the country’s electricity generation, more than 50% of which is concentrated in the central region, according to national development bank Cofide. The bank is supporting the financing of the project, which could result in an additional 2% GDP growth over six years.

Banks are also motivated beyond the medium-term margins for this transaction. GSP’s mini-perm structure likely spells potential book running roles on bond issuances in the debt capital markets to refinance the debt into the long term. That avenue is one being heavily cultivated by authorities throughout the region to meet vast infrastructure investment and financing needs. LF