Connecting Waterpeople
Premium content

"There is always an investor willing to put money to work in a performing asset"

Credit: Natixis Corporate & Investment Banking.
Credit: Natixis Corporate & Investment Banking.

Natixis Corporate & Investment Banking (CIB) recently announced the closure of financings of close to $1 billion for two water assets in Chile: the Aconcagua desalination plant and pipeline, which will reduce inland water use by industry and thus help to mitigate water scarcity.

With more than 20 years of experience in infrastructure and a background in civil engineering, Aitor Alava started his career on the project sponsor side, gaining knowledge of the infrastructure asset class. Moving on to the financing industry, he worked for Fortis Bank and BNP before joining Natixis CIB 12 years ago as head of infrastructure and energy finance for Spain and Portugal. Shortly after joining the Natixis CIB team in New York a decade ago, he started leading the franchise for Natixis CIB infrastructure for Latin America. In this interview, he discusses the firm’s involvement in infrastructure financing in this region of the world, and particularly the current situation and emerging trends in water asset financing

Can you tell us about Natixis CIB’s involvement in infrastructure financing in Latin America?

Natixis CIB infrastructure and finance in Latin America covers different sectors: power and renewables, transportation, water, social infrastructure, digital infrastructure, mining and midstream. So, it is a broad scope of infrastructure.

In Latin America, we mainly focus on U.S. dollar-denominated transactions. Depending on the country, there is an international market to finance projects under both loan and bond formats covered mainly by international banks like ours, but also there are local market solutions provided by local banks and investors.

We primarily focus on five countries, although sometimes we go beyond that: Chile, Peru, Colombia, Brazil, and Mexico. We have analysed and/or closed transactions in other countries like Uruguay, and Panama but we tend to stay in investment-grade countries where we have a local presence.

We see a huge need for infrastructure investment in Latin America, and we see this trend growing, particularly with respect to the water sector

We see a huge need for infrastructure investment in Latin America, more than in other parts of the world, and we see this trend growing, particularly with respect to water. I think water will be an important theme in the region for years to come. Mining processes consume a lot of water, and there is social awareness of water scarcity, so I do see a number of deals in Chile that will require mines to source their own water, and that will be done through desalination or other water solutions, through seawater pipelines.

This is a development that we will probably also see in the future in other countries where mining is prominent, such as Peru. In the water realm, there is a huge need not only for desalination, but also for wastewater treatment. Generally, there is a need for further investments in wastewater treatment plants in the region and plans to do so in some countries, like Colombia, Peru, and Brazil.

What is the significance of the water sector in the infrastructure space, and in particular desalination projects?

Regarding desalination, for the time being, I see a focus on industrial processes because the cost of water in desalination projects is usually high, so you need an economic rationale for it to make sense. In the near term, most desalination projects would be associated with industrial processes, mining being the most obvious example.

In the near term most desalination projects would be associated with industrial processes, mining being the most obvious example

Most of the mines need to use desalinated water, although it depends on how they have structured their production process. Some mines can operate with seawater, for example, the Centinela mine 70% owned by Antofagasta, but it depends on whether mines have made the necessary CAPEX investment to protect equipment from salt and corrosion.

I do not expect to see desalination projects to produce water for human consumption in the region for now. Probably the country that is ahead in terms of meeting mining water needs with desalination is Chile, where Natixis CIB led the closing of an almost $1 billion investment for a desalination and water pipe transaction last December. We're working on another deal and are engaged in discussions with two other clients who are proposing similar solutions for other mines in the country.

Natixis CIB successfully closed two senior secured financings amounting to $883 million for two water assets in Chile. Do you anticipate more activity in this sector in Chile? What about in the rest of Latin America?

In Chile there is a huge need for water; they have a perfect combination of water scarcity – Chile has suffered the effects of drought for many years, with the exception of last year, but the trend is there – and a strong social awareness focused on making sure that available water is primarily used for human consumption and then for agricultural needs.

Moreover, Chile is a copper mine country, and copper is a much-needed mineral for the energy transition in which the world is engaged. We are seeing large new CAPEX investments in mines in Chile, and for all those expansions, permits have a very strict requirement that the mine sources their own water; they are not allowed to use continental waters. Therefore, we expect the number of desalination water deals associated with mines in Chile to continue to grow.

Regarding the rest of Latin America, I think they are a little bit behind Chile, but again, I will not be surprised if in the years to come we see something similar happen in Peru, also a strong mining country.

Chile is a copper mine country, key for the energy transition: we expect desalination and other water deals associated with mines in Chile to grow

Also, as I mentioned earlier, there is a huge need in the region for wastewater treatment projects. This might take longer because, by design, they are largely publicly procured; you need a public entity to launch a tender process. By contrast, the deals we are seeing right now in the water sector are driven by the private sector, when water is needed to increase industrial production like in the case of a mine.

What role does Natixis CIB play in facilitating public-private partnerships (PPPs) or other collaborative models for water asset financing? 

I think this applies to public-private partnerships and also to private partnerships. We are experts in the infrastructure asset class; the bank has been doing this for many years. We are an Infrastructure one-stop-shop bank that provides debt, bond, financial advisory and M&A solutions for large and complex infrastructure transactions. We have an extensive network of professionals across the globe, there is a strong expertise of infrastructure as a class at all levels of the bank, including senior management, and the risk department. When you are knowledgeable about something, you feel more comfortable, so it's probably one of the businesses the bank is most comfortable with and, at the same time, our leadership is recognized by the market. We tend to focus on transactions, including water transactions, in which we can add value. We always lead the structuring of the transaction; for example, on the water deal we talked about, Aconcagua in Chile, Natixis CIB was one of the four lead banks.

Natixis CIB’s role is to underwrite deals, offering clients certainty of execution. We are always product agnostic and always present clients the pros and cons of each financing solution

Our role is to underwrite deals, giving clients certainty of execution; eventually, after closing, we will look to syndicate this through different channels. We can behave like most of the banks when it comes to distribution, meaning using as the main distribution channel other banks. But in our case, we can also mobilize other pockets of liquidity. In this regard, Natixis CIB has a unique investor partnership model where we have a network of around 10 to 15 investors across the globe with whom we share our pipeline, we share our deals, and we try and mobilize their liquidity to finance the projects of our clients. This pocket of liquidity is a little bit different from the more traditional bond market, which is something that we also do; we have and are currently executing various infrastructure bond transactions in Latin America.

So again, we help with structuring the deal. We help with providing certainty of execution through underwriting; we help mobilize different pockets of liquidity, and we are always product agnostic regarding the best financing solution. Usually, when a client approaches us with a project, there are two types of solutions: solution A with banks, and solution B, a capital market bond solution. We always present the pros and cons of both solutions because we feel comfortable with our ability to execute either. Some banks are very strong in one category and not in the other, and they tend to recommend solutions in the direction they prefer regardless of the best interests of their clients. We are very strong in both, and we recommend the approach that in our opinion makes the most sense for the client, for the project, for a particular time in market – and not what suits us best.

We also provide financial advisory services to our clients to help them raise the financing needed and come up with an optimal financing structure. Also, when it comes to M&A in the infrastructure asset class, we have a network of boutiques across the globe. Whereas a lot of banks will deploy their in-house M&A teams, Natixis CIB’s strategy has been to build a network of M&A partners in key geographic areas and markets. We have approximately 10 of them worldwide: in France, the UK, Spain, Australia, China, and the U.S. And in the case of Latin America, we have a partnership with Tyndall in Chile. Our rationale is that by partnering with these boutique M&A firms – most of them majority owned by Natixis CIB – we are able to approach M&A in a comprehensive manner across the globe. There is also the benefit of the entrepreneurial spirit of these M&A boutiques; they are more agile, and more flexible than if they were inside a big organization – yet, at the same time, each can leverage their product offering to clients thanks to the collective network effect of all these M&A partners. As I mentioned, all our M&A boutiques, except for Tyndall, are owned by Natixis. This network of M&A boutiques around the world also allows us to leverage local knowledge of their respective markets, for the benefit of the client and the transaction. So this model makes us a bit different. Regarding the infrastructure class, which is something very relevant for Natixis, M&A is a space where we are very active.

In your experience, what are some of the key considerations for assessing water assets in Latin America?

One important element is having a clear permitting process. Some of the deals have been delayed because it has taken a long time to secure the various permits, especially environmental permits. It depends on the country, but in the case of Chile this can be a complex process, so if there is a willingness and a need to mobilize capital and build more projects, it is important to have a very clear understanding of what’s involved.

Secondly, because there isn’t a market in which we can attach a value to water, all these projects really depend on an off-take contract. This means we need a bankable off-take contract with an investment grade off-taker and one long enough to allow meaningful amortisation of the asset. It must have adequate termination provisions because usually these assets are stranded, in the sense that, you are building an asset for a certain off-taker; if that off-taker does not honour its obligations, you don't have a liquid asset that you can sell to somebody else. That is why it is very important to have strong termination payments and a credit worthy off-taker.

I think that those are probably the two most relevant considerations. Obviously, you need an experienced sponsor. If you have projects that tick these boxes, there is always going to be liquidity to finance these projects. Water projects should always have strong social and government support because they alleviate a major issue – water scarcity.

How do you see the evolving regulatory and policy landscape in Latin America impacting the financing environment for water infrastructure projects?

Most of the water deals that we have seen and are seeing in Latin America involve the private sector, with the involvement of public authorities limited to granting the necessary permits like environmental approvals. However, a stable regulatory environment and a stable policy are the cornerstones of non-recourse infrastructure; without that, it is very difficult to structure a transaction.

A stable regulatory environment is the cornerstone for any non-recourse infrastructure project; without this, it is difficult to structure a transaction

To the extent that we start seeing more water deals that require heightened involvement by the government, for instance, a wastewater treatment plant that has a contract with a public entity which manages water services for a large city, it is key to have stable regulation, because otherwise the financing will not be possible on a non-recourse basis and the only way to do that will be with full recourse to the sponsors. This would increase financing costs, making it more expensive for the end-users.

At the end of the day, not having clear rules has a cost for authorities or for users in the form of a higher cost of water. Everything that reduces uncertainty and provides stability will allow for the opportunity to raise more competitive financing, thereby lowering the overall cost of the project.

Chuquicamata copper mine, Chile. Credit: Diego Delso, CC BY-SA 4.0, via Wikimedia Commons.

Are there any emerging trends concerning project financing approaches in Latin America?

There are two dimensions to this question. The first dimension concerns the sectors where we see more activity, and I'm happy to say that one of them is water. But I will start by saying that probably we will keep seeing a lot of activity in renewables. This is not a surprise, as the whole world is in an energy transition, building more renewable capacity, and Latin America is not an exception. I also believe Latin America needs investment in power base load technology, not just renewables, depending on the country, because it is a region with a lot of hydro. This is great when you have water, and it is very cheap. However, when we don't have water you will have a big problem, so you need a little bit of base load to balance the volatility of hydro.

Another sector is digital infrastructure; we have seen several data centre and fibre projects in Latin America. The third one, I would say, is water. Water is emerging dramatically as a key priority in the region, and this will only continue due to, as we discussed earlier, the current scarcity of water and because of the strong social awareness surrounding the responsible use of water.

Everything that reduces uncertainty and gives stability allows to raise more competitive financing thus reducing projects’ overall costs and a lower cost for end-users

The second dimension of project financing trends concerns financing structures. As I indicated, there are bank solutions and capital market solutions. Typically bank solutions are better designed for the construction phase, for greenfield assets. Then, once a project is built, you will do a takeout in the capital market with a long-term bond. This is why most of the structures we see in the region from a bank perspective are mini-perms; you give a client five to seven years and after construction they will refinance. Sometimes we're also seeing hybrid solutions in which you combine banks and investors in one transaction.

At one point in time, when clients approached mini-perm structures, there was concern regarding refinancing risk. I think the more they get to know the asset class, they understand the natural reduction in risk as an asset enters the operational phase and they become familiar with options that the bond market offers. They feel more comfortable with their projects’ ability to refinance, of course, if their transaction is performing. There is always an investor willing to put money to work in a performing asset. So, whereas previously clients would say they would only look at 20-year financings, that is not the case nowadays and fears over refinancing risks have moderated. And like clients becoming more comfortable with mini-perm structures, I would note that banks are as well, and it is what banks are encouraged a bit to do from a regulatory point of view. If banks can only raise financing for let’s say ten years, the regulator tells us that we should not grant a loan for longer because banks need to match assets and liabilities.