Full Spectrum of Financing Opportunities for RenewablesBy Dalia Maria de León | Thu, 04/02/2020 - 18:48
Q: What issues are hampering project financing in the industry?
A: Since the Energy Reform, the issuance of permits has been a main factor for banks when providing financing. A major concern of investors as been the feasibility permits. In the last year, the issuance of licenses that allow companies to reach a final investment decision has been critical. Similarly, the push for more private investment intensified after the enactment of the Energy Reform but that was then overshadowed by the cancellation of the auctions and questions around the rule of law. However, we believe that due to national energy demand and broad fundamentals in Mexico, the trend is again to look for private investors.
Q: What will be the industry’s main objectives for 2020?
A: We remain cautiously optimistic. Mexico has a very strong macroeconomic base. The country has a diversified and robust economy, a growing population, and significantly developed infrastructure, which needs an efficient power source. If projects are carried out properly, Citibanamex will continue financing them.
Q: How would you describe your relationship with the regulatory authorities?
A: In regard to communication between the private sector and the government, the change in government has had a much more pronounced impact than in any other six-year period. However, the lack of discussion with the government has not been a surprise. We believe that the cancellation of the airport and the gas pipeline issues with CFE have influenced the lack of communication. Markets activity during the first half of 2019 was very low. However, we saw an increase in the bank’s transactions pipeline and transactions executed in the second half of 2019. We believe this pick-up in pace is a result of the favorable resolution of stakeholder concerns on those two matters.
This government has a different way of doing things, and the private sector has had to adjust to an environment in which it cannot depend on public auctions or on the government to lead the conversation. This has changed the public-private dynamic. Many private companies are taking the initiative to find solutions and reach out to the government.
Citibanamex has played an active role in discussions with CFE, PEMEX and the Ministry of Finance on structuring the financing and raising the capital that will be necessary to achieve the administration’s objectives. We are a bank with strong ties in both the private and public sectors, and we are trying to bring both sides together.
Q: What is Citibanamex’s business strategy regarding distributed generation?
A: The distributed generation subsector is still underdeveloped in Mexico. We are active in the US in distributed solar generation and we consider the banks’ role in this subsector is to act as a bridge to the capital markets. We believe a similar situation will develop in Mexico. These types of agreements are typically long-term contracts, but the risk is more consumer-oriented. As such, it requires securitization other than a bank loan.
Q: What are the available financing mechanisms for renewable energy projects?
A: There is a full spectrum of possible financing mechanisms, from international public markets to structured project bonds with ad hoc investors. The truth is that we have not seen any shutdowns in access to financing. For viable projects and reputable developers, financing is available. These contracts involve long-term financing with a structured amortization depending on the PPA and we do not see a retraction at all. There is a great deal of available capital worldwide and Mexico remains an attractive investment destination. We have just financed a wind farm that is under construction with plans to start operations in two or three years. Of course, the existing capital markets and global crisis has dried up markets, but we believe Mexico is well positioned to recover once access to markets is regained.
Q: What is Citibanamex’s main achievement regarding project financing?
A: We have been successful in attracting global institutional investors to the Mexican market. We have also organized seminars for these investors. Citi has strong relationships with insurers and pension funds, among others, and these relationships allow us to structure transactions according to our client´s needs. We participate in many projects and work with CFE and PEMEX contractors. Our strength lies in connecting our clients with Citi’s international investors and broad global reach to capital markets.
Q: What are your recommendations for project developers in Mexico to secure renewable energy financing?
A: I would recommend that they dedicate more time to a project’s initial due diligence. They should resolve the issues involved in the pre-development phase, such as permitting and location. It is better to spend more time trying to get started than trying to structure something that has limiting financing options.
Q: Regarding renewable energy projects, what role should commercial banks have in the development process?
A: Commercial bankers need to be efficient when using their balance sheet to take risks, especially risks that the capital markets does not want to take. In regard to the energy sector, most of these projects are long-term assets that optimally employ long-term debt. Banks generally do not provide 30-year-term loans, but can and should participate with medium-term loans that smooth the way for the capital markets to take over the longer-term financing plans which ultimately match asset life with liabilities.