Project Financing through a Boutique Investment BankWed, 01/22/2014 - 14:20
Q: How have your sources of financing changed over the past two years and how will you adapt to growing financing needs in the Mexican market?
A: The major change is that on top of the Capital Development Securities (CKDs), we now have the Credit Opportunity Fund place through the Banamex private banking platform, where we can carry out capital calls once certain criteria are met. It is a very similar process as that involved for CKDs and this addition to our funding gives us sufficient capabilities to cater current activities. Nonetheless, we are expecting significant growth over the next few years so we will be exploring other sources of funding in order to keep meeting our clients’ needs. We will be considering issuing another CKD, issuing medium term notes in the Mexican Stock Exchange, and establishing credit lines with commercial banks or with development banks. Our current funding sources give us the capacity to fulfill our activities until mid-2015. We currently play a critical role in providing structured loans to the sector, and we solve 90% of our clients’ funding requirements. If Navix did not exist, our clients would have a significant problem in funding their projects as no other institution currently offers funding the way we do. However, funding is not the only aspect that our clients need. We want to transform Navix into a boutique investment bank, specializing in the oil and gas sector. As a consequence of that, we will be offering three additional services to our clients: syndicated loans when their amount surpasses our current funding limit of close to US$55 million per client, capital raisings, and strategic advisory.
Navix will play a critical role in getting both financial and strategic resources for our clients. We will also be critical in institutionalizing the sector as a prerequisite for receiving certain funds or in ensuring that capital clients have solid corporate governance. We will be offering local and international investors the opportunity to gain better exposure to the sector through co-investment programs, and we will fulfill President Lázaro Cárdenas’ dream of having Mexicans benefiting from our oil by reaching out to Mexican pension funds to provide capital for our clients. We believe that there is no better way for Mexicans to benefit from oil than by becoming shareholders of companies that provide services to the sector. By doing that, we would also address one of Mexico’s critical income distribution challenges as Mexican workers would have the opportunity to participate in the value creation that the sector will experience.
Q: How will risk assessment in project and enterprise financing change after the Energy Reform is implemented?
A: We do not see a major change coming in terms of credit and performance risks as the nature of the projects will remain unchanged. We will continue assessing risk in the same manner as we have done in the past. Our model is quite robust in the sense that we only fund projects which already have a contract with PEMEX or with another public entity. Moreover, we isolate the cash flows in these projects by creating a trust where PEMEX makes payments in connection to the contract and we control the outflows. However, one of the challenges that the implementation of the Energy Reform will bring is the amount of resources needed for the sector to open up. Capital expenditure will increase significantly. As a result of that, the industry needs to prepare itself to manage the increased volume without compromising controls and analysis.
Q: How can SMEs adapt to the competitive market that will be established after the Energy Reform?
A: Most of our clients are SMEs that excel in their operating standards but have not been required to develop their strategic and financial planning capabilities. A critical change in the competitive landscape is that PEMEX will not be the only client in the sector. We are aware that in some cases, the operating standards that IOCs require from their suppliers exceed what PEMEX has ordinarily requested. Our clients need to understand what those gaps are and develop the capacity to offer services not only to PEMEX, but to any international company that plans to operate in Mexico. The window of opportunity for our clients to adapt will be driven by the timing of the implementation of the Energy Reform. If they do not prepare themselves in the next two to three years, they could well disappear. We have started an open dialogue with our clients in this regard and they have taken our recommendations on board very well. We believe that they should bring in independent board members, revise their corporate governance, and reinforce their management teams. Another element that has comforted our clients is our ability to provide sufficient financial resources to back their expansion plans. If they have a good project, the funding will be there.
Q: What role will Navix play in the creation of joint ventures to seize nascent opportunities within the industry?
A: We will have to analyze the potential for joint ventures on a case-by-case basis. It will depend on what is best for our clients. If they only need capital, and do not require additional expertise to reinforce their operational capacity, we can surely help. However, in some cases, our clients will need to consolidate what they have been doing or enter new areas of activity. Many companies reach out to our clients and try to convince them to tackle other service sectors which they are unfamiliar with. This is why we must analyze each proposal on a case-by case basis. There is a lot of interest from local and global players, which is a benefit for Navix. However, controversial cases that have occurred in the Mexican oil and gas industry will hopefully make new enterprises much more careful when coming into the market.