CHAPTER 5 LATIN AMERICAN MINES & METALS PROJECT FINANCING: THOUGHTS ON CURRENT MARKET CONDITIONS

• Jurisdiction: Derecho Internacional

International Mining and Oil & Gas Law, Development and Investment
(Apr 2009)
CHAPTER 5
LATIN AMERICAN MINES & METALS PROJECT FINANCING: THOUGHTS ON CURRENT MARKET CONDITIONS
Cynthia Urda Kassis
Shearman & Sterling LLP
New York

Cynthia Urda Kassis is Co-Chair of Shearman & Sterling's Global Project Development & Finance Group. She represents U.S. and non-U.S. corporations and financial institutions as sponsors, borrowers and lenders in project development and finance matters worldwide. Ms. Urda Kassis has a wide breadth of experience in the metals and mining industry, having represented all manner of companies - from major, multinational corporations with significant asset portfolios and extensive development and operational experience - to junior metals and mining companies developing and financing their initial property - to the lenders to both types of companies worldwide. Ms. Urda Kassis has a special focus on Latin America with decades of award-winning experience in the region, having recently advised on the historic Panama Canal expansion. She is currently advising Pueblo Viejo Dominicana Corporation, a joint venture between Barrick Gold and Goldcorp, in the proposed project financing and power arrangements for the development of its gold and copper resource in the Dominican Republic and recently advised a joint venture between Mitsubishi and Komatsu in the proposed truck transportation system project financing for an operating mine in Chile. She works regularly with a wide variety of lending sources, including international commercial banks, sponsor/vendor facilities, local banks and other funding sources and development/export credit agencies, including extensive experience with CAF, EDC, EIB, IADB, IFC, JBIC, KfW and a number of export credit agencies.

I. Introduction

For the past two years the international financial markets have experienced a series of unprecedented developments - beginning with the US subprime crisis and stretching through to the bankruptcy of Lehman Brothers and the subsequent global contagion and general decline of many of the world's economies into a recessionary environment. As a result of these events, for the past year the international debt markets have been operating under serious capital constraints. The leveraged finance market has been largely shut since the summer of 2007.¹ The international debt capital markets, though occasionally open for short periods during which high grade issuers rush to market, have seen very limited new issuance volumes -- the lowest in a number of years.² Numerous international commercial banks have disappeared or withdrawn almost completely from the international loan syndication market. The syndication market is suffering from a crisis of confidence and some argue is currently not functional.

Notwithstanding the above, the project finance market had one of its busiest years ever in 2008. Globally, issuance volume was up at year end by 10.5% from 2007, reaching an all-time high.³ Although the new issuance volume in Latin America was down by yearend 2008 from 2007 by 7.6%, the first half of 2008 had the highest activity levels in the last seven years. By the end of 2008, a number of large and very high profile project finance transactions in Latin America had closed, including in the very difficult market conditions in the second half of 2008. Peru LNG⁴ and GNL Quintero,⁵ two LNG projects, closed financings in 2008, as did a number of power projects, including Anagamos⁶ and Zorro,⁷ and, in early 2009, Andino CTA⁸ being among them. Finally, the Panama Canal Authority closed a $2.3 billion financing for its Expansion Program in December 2008.⁹

On the surface then, at least, it appears that project financing has not been negatively affected by the current adverse economic and market conditions. While it is true that unlike other debt

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financing markets, the project financing market remains open for substantial business, it would be wrong to conclude that it has not been negatively affected by the current conditions. In fact, the project finance market has changed in a number of respects - some quite fundamental - over the past two years.

Although the basic risk categories which must be addressed to structure a financeable project remain essentially the same, and the allocation of risk among equity and debt within such categories also remains essentially the same, project financing has changed significantly in many other respects. First and foremost, the main sources of financing have changed dramatically. The number and identity of the players and the depth of available liquidity within each source have changed so as to be almost unrecognizable from two years ago. The terms available in the market have also changed significantly. No longer are sponsors able to run competitive tenders, largely imposing borrower-friendly terms, and be assured that their financing will likely be oversubscribed. The market is now quite clearly a lenders' market with the amount of leverage permitted being much reduced, pricing having increased several fold, tenors having shortened and overall covenant packages and general flexibility being more restrictive.

As noted, the list of the main sources of debt financing for projects, including mines and metals projects in Latin America, remains a familiar list - at least on the surface: the international commercial bank market, multilateral development banks and export credit agencies, the international debt capital markets, equipment leasing and vendor financing, and domestic financing from local commercial banks and local bond markets. However, on closer examination, the main sources of project financing have changed dramatically in terms of which sources are the most active and have the deepest pool of players and funds and the specific identity of the players within each source.

Set forth below is a review of the fundamental reranking of the familiar sources of debt financing on a source-by-source basis as well as an analysis of some potential strategies that can be considered by sponsors of mines and metals projects in Latin America in arranging financing.

II. Sources: Familiar List/Fundamental Reranking

1. International Commercial Banks

Historically and until quite recently, the international commercial bank market has been consistently a deep source of project financing generally and for mines and metals projects in Latin America and elsewhere particularly. This depth was evidenced in terms of the number of international commercial banks active in this sector, the amount of funds available generally and for any particular project, and the in-house expertise which had been developed by a number of these institutions with respect to this financing structure and the main industries which used it, including the mines and metals industry.

Historically and until quite recently, the international commercial bank market had been consistently one of the most attractive sources of financing for Latin American mines and metals projects. The players in this sector, because of their internal expertise and the volume of business which they executed, were able to move quickly and were flexible in terms of

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structuring and general terms. When liquidity in the international debt markets flowed freely, they were susceptible to competitive pressures and willing to be aggressive in the negotiation of pricing, tenor and other terms including acceptable leverage.

Finally, historically and until quite recently, there was a very active primary and secondary syndication market for project finance debt in the international commercial bank market. Thus, it was possible for sponsors to obtain fully underwritten commitments for their full financing requirements from one or a very limited number of international commercial banks; such commitments, in some cases, being subject to very limited conditions.

None of the above is the case today. First, the number of international commercial banks active in the project finance market has been reduced dramatically, with some of the old familiar names having disappeared or all but disappeared from the market. Second, even those players still active are generally not willing to commit large amounts of capital to any particular project. In the current...