German Financing for Mexican RenewablesWed, 02/19/2014 - 12:01
Q: Could you give us a brief introduction to KfW and its subsidiaries, their activities and their specialities?
A: KfW, with assets of more than €500 billion, is the largest national development bank in the world. It has three subsidiaries that are active outside of Germany: KfW- Ipex Bank, KfW Development Bank, and KfW-DEG. DEG is KfW’s subsidiary focused on promoting the private sector in emerging economies. Its mandate is to directly finance projects that are at least 51% privately owned. There is no need for any German or European supplies or sponsors, DEG can finance projects which are 100% Mexican. However, we do need for these projects to have a developmental impact on the country such as job creation, infrastructure development or a contribution to combat climate change. DEG provides the whole range of financing products from straight equity through different types of mezzanine financing to senior loans. Our portfolio at the moment is about 40% equity/mezzanine and 60% senior debt, but we want to grow more on the equity/mezzanine side. We always provide long-term financing, starting from four years and going up to periods longer than 15 years. DEG provides financing ranging from US$10 million to US$50 million, depending on the project. Together with partners, we also offer syndicated senior loans above US$100 million.
Q: How do the opportunities in Mexico compare to other Latin American markets where DEG is active?
A: Last year, Latin America was the most important region for DEG regarding new business and commitments. In DEG as a whole, we committed about €1.3 billion of new business last year, of which €500 million went to Latin America, with €100 million for Mexico. This made Mexico the second largest country within DEG in terms of new commitments, just behind India. To come second in DEG’s investment universe is quite an achievement, as we are talking about Mexico being ahead of Brazil and China. Within Latin America, and specifically in the renewable energy sector, Mexico is definitely one of the countries with the highest potential. So far, we have mainly financed wind energy projects. In the past, Mexican wind farms have been very competitive, mainly in Oaxaca, but the sector has been spreading in different regions of Mexico. While we expect wind projects to continue, a new big wave has started in the solar photovoltaic industry.
Q: After seeing the opportunities in Mexico, what would be the most important challenges that this country needs to face?
A: It is difficult for me as a foreigner to comment about this topic. A main concern from the banking perspective is that the PPA offered by CFE, within the small power producer scheme, is not at a fixed price. The dependency of prices on the short term total cost makes it very difficult for banks to finance such projects. One of the reasons why wind energy has been relatively successful in Mexico is that regulation has enabled self-supply projects for the private sector which involve a fixed-price PPA.
For Mexican companies, it can be very difficult to obtain long-term financing from commercial banks and funds alone, so we offer our services as a development bank to overcome these challenges. We have investment experience in more than 85 countries and our dedicated sector experts in Cologne can draw from that experience when assessing projects and coming on due diligence missions. Being a German governmental entity, our financing for a company or project provides a ‘seal of approval’, which we have seen can really add value when it comes to relations with other banks or planning an IPO at a later stage.
Q: How large would you consider the financing demand to develop renewable energy projects in Mexico to be?
A: There are many project ideas in Mexico but only a small number of them are going to be solid enough to get financing. Therefore, the challenge is to match the good projects with the available financing. It is always more difficult at the beginning of a cycle to distinguish good projects from bad ones. But when the current ‘gold rush’ in solar PV has settled, criteria for project and financing success will have been found and tested, leading to a more transparent and straight-forward selection process where good projects will obtain financing. This has already started since the first project in Baja California became operational. Due to its isolation from the national grid, Baja California is a special case and may not quite yet lead to a breakthrough for solar PV projects on a national scale. But in the end, I am fully convinced that viable projects will attract financing.