Thursday, 17 January 2019

Seeking growth in Latin America

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Banco Santander is one of the most active banks in Latin America, combining its global reach and local operations to pursue opportunities in the region. By Nic Stone.

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If you look across some of the notable deals in Latin America this year you are likely to find Banco Santander somehow playing a role. The Spanish bank has been advising the winning consortium on the Lima Metro Line 2 project in Peru that involves a multi-billion dollar financing package as well as being heavily involved in the Los Ramones pipeline projects in Mexico, among others.

Santander is focused on core countries for project finance in the region, namely Chile, Brazil, Peru, Colombia, Uruguay and Mexico. The bank sees opportunities growing too in all sectors, especially oil and gas pipelines, the renewable energies of solar and wind, roads, ports, mostly contracted but with an increased assumption of merchant and traffic risk, as well as some opportunities in the public-private partnership space.

The bank’s organisational model provides different Santander local banks in the region with full independence in terms of risk assessment on the deals they participate in. The group has teams in New York, Mexico, Chile and Brazil, including more than 40 people in the front offices.

It has a client-based model, with local coverage teams offering a global product catalogue that develops its activity through local banks with a presence in the group’s core countries. This local presence is complemented by a global team looking after opportunities in the remaining regions and providing international support to those local teams. From a business perspective, and despite the many and disparate offices, the bank operates as one team.

As a lender, Santander has managed to be the leading commercial bank both in Brazil and Mexico this year, where it had committed around US$3bn by September 30 across more than 60 transactions of pure infrastructure financing. The bank has underwritten deals in most sectors, including energy, oil and gas, and transportation, and is one of the most active institutions that the local authorities are speaking with in order to find the most adequate ways to develop both the investment and the financing of infrastructure projects in those countries.

As an adviser, Santander has led 47 transactions so far this year. It has developed different structures that play across the capital stack. Some of the transactions the banks has completed include the use of development banks in Brazil, multilateral agencies, export credit agencies, investment funds in infrastructure as well as more traditional commercial lending. It also has a number of novel ideas for the institutional market that it is looking to develop.

Sitting atop the pile is Carlos Muñiz, global head of project finance and acquisition finance in Santander Global Banking & Markets. He is managing director and leads the origination and structuring of non-recourse financing globally from the bank’s offices in Madrid.

Before this position, Muñiz was responsible in the credit department for non-recourse financing, underwriting risk and derivatives also at the bank, which he joined in 2005. His background includes experience across different products such as M&A, lending, advisory, credit, debt capital markets and derivatives across a number of geographies, having worked on Latin American, Australian, US and European transactions. Prior to joining Santander, Muñiz worked with BBVA.

His take on the region and the opportunities available as well as strategies to succeed in the market have helped him grow Santander’s operations in the region. “We see an important increase in the pipeline throughout the region but as a bank, we are focused in our core countries for project finance,” says Muñiz.

The bank tends to focus on developing its pipeline of opportunities locally, before involving its international teams.

“Local business units are key in identifying local opportunities that we share with the rest of the organization, and they benefit of the bank’s network to raise deals that they were not aware of. We are as local as the local banks from a relationship point of view and knowledge of the market but with the advantage of the global experience and network,” Muñiz says.

“That is why sometimes we are more competitive or more conservative than local banks, just because we have experienced a certain structure, sector or technology anywhere else and know what we can do and what we should not be doing.”

Bringing that global know-how is important in Latin America. With the maturation of the market, the rise in sovereign ratings and a myriad of projects hitting the market, bringing successful and novel financing structures from other parts of the globe to the region will become more prevalent in the coming years. For Muñiz, this means a number of things.

“A number of projects are typically promoted with US dollar payments, and have access granted to a global highly competitive liquidity pool both for equity and debt,” he says. “However, in some countries, the main challenge is the use of local currency as the projects are being promoted in [currencies such as] pesos or reais, reducing the amount of financing available to them and increasing the returns that the investors are looking to obtain.”

Thanks to the number of local operations the company has in the region, completing local currency financings is one of the offerings it can make. Santander recently provided a roughly US$40m Chilean peso denominated VAT facility to the sponsor group behind the Kelar project, which allowed for a cheaper source of funding on taxation payments.

“Thanks to its strong presence in the region through different local banks, Santander benefits from local funding in most currencies, allowing us to compete in domestic arrangements.”

In addition, public institutional debt capital markets in both local currencies and dollars are proving to be an alternative source of financing for various asset classes, and becoming the preferred solution not only for brownfields but also may fit some greenfield projects, according to Muñiz.

“Santander has placed several project bonds in both local currency and US dollars, helping our clients to improve their cost of funding and reaching tenors that were not available in the banking market,” he says. “Our debt capital markets franchise combines a massive access to and understanding of both local and dollar investors, making us one of the most reliable institutions in providing this type of solution either on a standalone basis or combined with complementary debt formats.”

The increase in liquidity and sources of financing means that banks are seeing more work to optimise structures. “As I said before, debt structures mostly in dollars are becoming more competitive and complex, combining ECAs, multilaterals, commercial debt, institutional tranches and bonds. The availability of all these different sources is pushing tenors up and pricing down but, as opposed to other geographies, we are confident that the prospectus of a huge pipeline may allow all different formats to co-exist in an efficient market.”

Another area of competition for traditional commercial bank debt is coming from an increase in private equity funds, mezzanine lending and other novel financing instruments that are emerging in the region.

“It is a fact that there is a lot of liquidity available in the market and it is great to see that you can find different investors for almost any kind of risk, making projects happen that in a different market environment would not be fully funded,” says Muñiz.

“Banks are understanding that it is not always necessary for them to run the extra mile but to find the right investor at the right price to allocate the risk they should not be taking. This, of course, complicates the structuring and documentation of the deals, making more valuable to sponsors the advice of experienced institutions like ours, but also helping investors to crystalise projects, thanks to a right allocation of risks to the counterparties that can take it and at the right price.”

In terms of specific projects, Santander has been working as financial adviser on some of the region’s more notable deals.

“There are many examples of deals where we are involved and several we are very proud of,” says Muñiz. The bank was a key part of Iridium, FCC, Impregilo and Grupo Finmecanica to be awarded the Lima underground Metro Line 2 project. The bank has been adviser to the consortium since they started to pursue the transaction, assessing them in the bidding strategy and offering different debt solutions combining all funding sources available.

The group has been looking to optimise the deal throughout the year. The latest iteration of the financing being mulled includes a US$1bn 10-year bond issue; a potentially US$1.05bn Inter-American Development Bank loan tranche; another US$400m loan tranche guaranteed by Italian ECA Sace and funded by Italian state-owned lender CDP and by Intesa Sanpaolo and Societe Generale; a US$300m–$400m revolving loan to be covered by government milestone payments every three months; and a VAT line. The deal highlights the multiple tranches common in larger transactions in the region.

“We have also been advising several clients in Brazil to be winners in the different electricity auctions, especially in the solar space as this was the first year when this technology was considered,” Muñiz says. He makes special mention of a financing in Brazil that shows innovative financing structures that are cropping up.

For Renova’s 386MW Alto Sertão II Wind Complex, the deal saw a portfolio financing structure at sub-holding level and included BNDES funding in Brazil in which Santander acted as the exclusive financial adviser. The BNDES loan was for R$1.044bn (US$458m) and it took out a R$600m (US$267m) bridge loan that the company secured last year, which was set to mature on June 15 this year. The financing has a tenor of 16 years.

In Mexico, Santander is playing an important role both as adviser and financier in all the projects related to the energy reform, and in particular in the Los Ramones pipeline – putting in place creative solutions with local development bank Banobras to maximise the liquidity available for funding this and future projects at the best available conditions.

Despite advising on the deal, Santander declined lending to the first section of Los Ramones. The lender group includes Mizuho, Credit Agricole, BayernLB, SMBC, BBVA, Natixis and development banks Nafin and Banobras. The US$970m, 20-year loan also features a 3% reserve loan, with pricing in the low 200s over Libor.

“We have been advisers in the Los Ramones financing and we will be also financiers on Ramones Sur with an innovative structure we think is setting a new precedent to be replicated in several deals in the future, that successfully puts together public banking and commercial banking capacities,” says Muñiz.

“In Mexico we are very much focused in finding creative solutions like this one and in promoting the institutional investors [local and international] take-outs, as the potential pipeline is so extensive that exploring alternative sources of financing to complement public and private bank debt will be key,” he adds. “I am looking forward to seeing that, as we have done with most of the projects we financed in the past, the ones we finance today are taken to public debt markets soon.”

Another example is Ventika I & II, Mexico’s largest onshore wind farm and one of the largest in Latin America, with Santander acting as co-ordinating bank, mandated lead arranger and documentation agent in a dual-tranche club deal structure.

A US$490m project-level debt financing was provided by the North American Development Bank, Banobras, Nafin, Bancomext and Santander. Banobras and Santander acted as hedge providers. The financing was split into two tranches, a 10-year commercial bank tranche and a 20-year development bank tranche. The interest rate on the short tranche is 2.96%, while the long tranche got done between 3.63% and 3.68%.

Moving forward, the bank is still looking to innovate. The bank’s chairwoman Ana Botin recently pledged US$10bn of credit for infrastructure projects in Brazil, where Banco Santander Brasil in the nation’s largest foreign lender. The bank is also in talks with large Brazilian companies for the country’s maiden Green bond offering.

The key players in the bank’s Americas operations include Javier Martín Robles, who heads up the LatAm operations, César Vertiz in Mexico, Diogo Berger in Brazil, Arken Jensen in Chile and Jorge Camiña from the US.


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