Financial Expertise of German Development BankWed, 02/24/2016 - 14:14
Q: What made KfW-DEG (DEG) choose Mexico as one of its largest operations worldwide?
A: Mexico is within DEG’s top five countries. We mainly operate in industries such as agriculture and infrastructure, which includes the renewable energy sector. Considering this diverse range of industries, Mexico is a significant player for us. We have a different structure from local development banks, as these can only finance within Mexico and come under a lot of political pressure to generate returns. DEG can invest in any emerging economy, but we never felt comfortable with the risk on the debt side for financing a small power producer project. I can see DEG being a pioneer on the equity and mezzanine front. Our value lies in that fact that we contribute global benchmarking, international standards, and international best practices to projects, differentiating us from local development banks.
Q: How do you compare the ease of financing legacy projects that existed before the Energy Reform as opposed to projects that are now initiating?
A: I believe legacy projects are going to fill up our project pipeline for 2015 and 2016. The continuation of projects is a reflection on the fact that Mexico is a wide market and the government is promoting renewables. Being under the old scheme is optimal right now, but new companies will have to accept a slight delay, since starting a new project now implies playing a pioneering role. The main question that every renewable energy developer is asking is whether the new regulation will prove better than the previous one. Most are taking a cautious approach, by locking projects under the old structure while gauging the implications of the new regulations. The secondary laws have been issued, but it will still take time for the new model to be properly constituted, and afterward, we will have to wait for a conflict that indicates court rulings in order to measure the functioning of the system.
Q: Will DEG be a pioneer institution that will get involved with new projects to help accelerate their financing?
A: Definitely. DEG offers equity and mezzanine funds, as well as senior loans, and as a development bank, we can take risks that others cannot. There is considerable liquidity in terms of debt in the renewables sector, which comes from the commercial banks and is targeted for projects with a fixed-price PPA. We identified the greatest business opportunity in the Mexican renewables sector as belonging to equity and mezzanine funding, covering the majority of the projects we acquire in the renewables sector. In the future, I foresee DEG continuing with senior loans, especially for long tenures and dollar-based PPAs. We would also be willing to provide senior loans for projects that make sense under the new scheme.
Our acquisition strategies are regionally organized, and we look at all the sectors in the regions where we are active. At the second stage, after approval and clearance, we pass the projects on to DEG departments in charge of due diligence and handling negotiations until the first disbursement. Those in charge of this process are sectorial experts who are familiar with the regulatory frameworks of the countries in which DEG works. When it comes to Mexico’s specific situation, we are a small organization, so we rarely carry out entire sectorial studies independently from a project, instead waiting for an attractive project. During due diligence on a specific project, we can draw conclusions that may apply to the sector in general. We can also ask for help from sectorial advisors or law firms that can help us understand the bigger picture.
Q: Do you anticipate DEG keeping its primary focus on wind, or are you open to financing more solar or geothermal?
A: DEG should definitely look at solar and we have been in contact with several solar developers in recent years. Nevertheless, we have only financed a small number of projects, since the progress of the solar sector in Mexico has been disappointing, although we are open to more projects in the future. In terms of hydro projects, we have a few interesting transactions in the pipeline, and these projects come with a viability that makes them easy to promote internally. Geothermal is an interesting source and there are some meaningful projects taking place in Mexico, in which NAFINSA and Munich Re are involved with rotating financing. DEG is also interested in participating in this sector, as we have financed large geothermal developments in Kenya.