Needs of a Newly Opened MarketTue, 06/26/2018 - 18:13
Q: In which industry does Crédit Agricole CIB have the biggest portfolio share in Mexico?
A: In Mexico, the energy industry represents around half of our portfolio of activities, followed by the automotive sector and construction materials. The projects we get involved with are generally valued at US$1.5 billion or more. We manage direct loans, syndicated loans, hedging (derivatives), debt capital market transactions and M&A and financial advisory. We can also cover interest rate and exchange derivatives as well as deposits and other products related to investments. Crédit Agricole CIB has significant expertise in all areas of structured finance, ranking in the Top 5 in the world in areas such as project finance, reserve-based lending, shipping finance, aircraft finance and securitizations. We are also a pioneer and worldwide leader in sustainable finance and green bonds.
Q: What Crédit Agricole CIB service has been difficult to introduce to the Mexican market?
A: We are among the most experienced banks globally in reserve-based lending, which has not yet taken off in Mexico because the regulation has not been fully developed to support this activity. Through this service, new upstream oil and gas projects can be financed on a non-recourse basis through the sponsor. A loan is provided on the basis of the amount and value of the reserves of hydrocarbons of a given project. However, there are a few remaining issues to make this fully bankable in Mexico, like what to do if a block has to be reauctioned.
Q: How has the international industry reacted to the new framework for the Mexican electricity industry?
A: The Mexican electricity market is relatively new and has a limited history and track record. This causes final users of electricity, sponsors and banks to take a cautious approach to the spot market. That being said, we are seeing continued activity and efforts by all participants to advance the market and continue developing projects. Financial innovation will be key in this regard.
Some projects are being developed without a long-term contract for the entire energy production. The risk that arises when a power generation project does not have a secure long-term buyer is called merchant risk; the greater the proportion of generation that is not secured by a long-term buyer, the greater the risk involved. The financing market in Mexico is still in its infancy in terms of handling merchant risk because of the electricity market’s lack of history but sponsors, off-takers and banks like Crédit Agricole CIB continue to innovate.
Q: How should factors like merchant risk be tackled in the Mexican market?
A: A select few financial institutions, such as Crédit Agricole CIB, have international experience in handling these types of issues and can use their international knowledge to support the development of the market in Mexico. Nevertheless, the risk from having no historical track record for prices remains, making it hard to create bankable projects. This, as in other countries like Chile, will continue to develop with time. We are already seeing and considering innovative structures to finance these types of projects.
Q: How have CFE and PEMEX evolved as the Energy Reform has unfolded?
A: The Energy Reform meant that CFE and PEMEX were given the mission of creating value as opposed to maximizing their production volumes or participating in certain projects that are strategic for Mexico’s development, regardless of the company’s expertise or profitability. As productive enterprises of the state, these companies could no longer take on those projects. This gave them the chance to focus on more profitable activities.
The new administration seems to want to revert part of this trend. This can be positive as some aspects of the Energy Reform may have been too stringent. However, the challenge going forward will be to wisely allocate PEMEX’s and CFE’s limited budget to pursue their activities, which means they will have to remain selective.