Marian Aguirre
Energy Finance Vice President

Bankability to Entice Commercial Institutions

Wed, 02/21/2018 - 11:54

Mexico’s long-term electricity auctions are considered the benchmark of the country’s energy transition. To guarantee their success, the Ministry of Energy announced in August 2017 that development banking institutions had approved the first financing packages for the auctioned projects. The participation of the development banks is critical. 

“Echoing the vision of the Ministry of Finance we want to incentivize commercial banking to participate in these types of projects,” says Marian Aguirre, Energy Financing Vice President of Bancomext. “Our institution is involved across the sector’s value chain, including generation, distribution, transmission and all the segments in oil and gas.” Showcasing bankable projects is the institution’s bet to dissipate prevalent worries pertaining to market risks as there is not yet a long enough track record to make an informed investment decision. “We are aware that commercial banks have a more complicated setting in which to absorb these risk levels, which is why we provide A/B loans so they can participate via shorter time frames, as some banks have term limitations.”

While long-term projects are predominantly financed by development and multilateral entities, Bancomext can participate with two schemes. Either through mini perms for which refinancing takes place during the last year, or taking shorter financing tranches, where Bancomext covers the rest. But the core issue remains devising financing schemes that can ensure with a certain degree of certainty an economically viable and profitable project. “We use project finance schemes in which every risk factor is compartmentalized and mitigated separately,” says Aguirre. For instance, Bancomext uses Debt Service Reserve Accounts (DSRA) via Contingency Lines of Credit to protect lenders against cash flow variations once the loan is refundable. Term reduction mechanisms are also used, such as anticipated payment schemes or cash sweeps. “We provide the tools necessary for a tailored solution for each project’s specificities based on a particular financial structure where a commercial bank can work with the risk levels it is comfortable with,” she adds. 

The latest instrument to be introduced by Bancomext to the benefit of commercial banking is the Imbalance Account. “This 
novelty helps when there is insufficient power generation. In that case, a power purchase must be completed to compensate the shortfall, which, considering power price fluctuations, is an additional risk and cost that the project should not incur. Based on differential calculations, this account can cover potential imbalances. Bank committees are quite satisfied with it,” Aguirre says.
Mexico’s energy projects require sizable financing, which Bancomext provides normally on a co-financing basis. It works closely with other development banks to coordinate energy portfolios, reaching combined assets of more than US$2.5 billion in 2016. “Even when every bank has its own risk areas, particularities and different mandates — Banobras for infrastructure projects, NAFIN for productive chains and Bancomext for foreign trade — the financing needs of the sector are quite high. Our common denominator is that we consider energy as a strategic sector for the country’s economic development,” says Aguirre.

Aguirre also stresses the importance of social and environmental factors in the bankability of projects: “Bancomext’s rules stipulate that every project we take to our committee must comply with our Environmental and Social System (SARAS). Our system’s focus is primarily based on the Equator Principles and IFC standards.” Mexico’s energy market transformation also entails a major shift toward social and environmental components, making Environmental and Social Impact Assessments a mainstream practice deeply embedded within projects from the initial structuring and followed throughout the financing life cycle. 

Bancomext’s objectives for 2018 are focused on supporting the reform’s projects. “We are still in the process of assimilating the gears and shifts of the auctions, as well as taking on the challenge of providing the best financing options for the projects assigned through the third auction’s Clearing House,” Aguirre says. The development bank is setting things in motion to face the complication of financing and managing simultaneous utility-scale projects. “Between August andSeptember 2017, we concluded six financial closings of auctioned projects. That was quite a challenge.”