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Infrastructure funding: Experience counts on the road to Farac II

Markets have changed and so will the terms for Mexico’s next round of toll road financing.

As Farac II, the second toll road package of 11 due for auction in Mexico, nears its September deadline for proposals, it is to be hoped that hindsight has played a key role in what bidders come up with.

The first toll road deal, in October 2007, was a peso-denominated financing package worth Ps37.1 billion ($3.3 billion) – the biggest in Mexico’s history. But since Farac I closed, the international markets have been in free fall. It is unlikely in the present climate that Santander, which solely structured and underwrote the transaction, would be able or willing to front such a large deal again – especially as the initial deal stretched the local Mexican market to its limit.

Investors are still interested in toll road deals but on different terms. This time, as the bidders line up for Farac II’s auction, some notable changes in their financing packages are to be expected.

Despite the limits of the local Mexican market, local-currency financing is the best option. Road tolls will generate peso-denominated profits and the Mexican derivatives market continues to be illiquid. It is right to avoid foreign-currency risk but careful management of the financing process in Farac II could lead to better profits for the banks involved this time around.

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