Proximo Weekly: Chilean electricity securitisation – simplify to diversify
Chile’s latest tariff recovery receivables securitisation demonstrates the willingness of the Chilean government to ensure bankability whatever the market conditions.
Goldman Sachs, JP Morgan and ITAU BBA have completed the placement of a $784 million 144A bond securitisation of Chilean electricity receivables.
The financing is the third for a stream of Chilean tariff recovery receivables, and the first use of a 144A B bond structure. But it relies on an updated local legal framework compared to the first two deals, and has a more straightforward structure.
The ten-year dollar bonds issued by Chile Electricity Lux MPC priced at a 165bp spread to the equivalent US Treasury for a coupon of 6.01%, or about 90bp higher than where the Chilean sovereign stands. The bonds carry ratings of A from S&P and A2 from Moody’s, the same level at which each agency rates the Chilean sovereign.
The 144A bonds complement a $110 million A bond that was retained by IDB Invest, and a forthcoming 4(a)(2) private placement split into four tranches of $16 million, $15 million, $25 million and $265.8 million. The issue is only the second time that IDB Invest has used an A/B bond structure with a 144A issue.
The 144A bonds and private placement are essentially repack securitisations of a participation in a vehicle that IDB Invest set up to buy receivables from a group of Chilean generators. The IDB has been central to the evolution of the tariff receivables structure, part of the compromise that allowed the Chilean government to head off protests against rising prices in 2019.
When Chile froze prices, it allowed generators to recover the difference between those prices and contracted prices over time, in the knowledge that new renewables capacity was likely to be priced inside that cap. Two deals – a $489 million Goldman Sachs-led 144A issue, and a $139 million A/B bank loan financing featuring IDB Invest, Banco Santander and BNP Paribas – closed in 2021, backed by separate sets of receivables due to different sets of generators. The proceeds provided crucial liquidity to those generators in the aftermath of the freeze.
According to a source that worked on the deal, the latest transaction rests on a more simple structure. The earlier two deals, which fell under the PEC law, were backed by sales of a total of $1.35 billion in receivables to an issuer by generators. The latest tranche of receivables fall under the MPC law, which authorises $1.8 billion in receivables, and which, crucially, carry a state guarantee.
IDB Invest has acquired nearly all of these receivables and can then sell down participations in the receivables to other investors. Its exposure is primarily to the MPC Fund, which carries a sovereign guarantee, rather than the generators. Investors in the B bonds benefit from both the sovereign guarantee and the IDB’s preferred creditor status.
The coupon on the latest set of MPC bonds, at 6.01%, is quite a lot higher than the 2.6% yield at which the zero-coupon PEC bonds were sold. But the yield on the Chilean 10-year bond has gone from 3.5% to 5.8%, while the yield on the 10-year Treasury has moved from 1.2% to 4.2%. In current market conditions, a PEC structure might have priced considerably wider.
The Proximo perspective
There are two constant themes in the last three decades of capital markets evolution for Latin American infrastructure. The first is that when conditions are unsettled it pays to simplify your credit story. The second is that the Chilean government raises its game in response to market feedback.
Whether in toll road concessions or solar project tariffs, Chile can be relied upon to make sure that infrastructure obligations are bankable whatever the market conditions. According to a source that worked on the Chile Electricity Lux MPC deal, the Chilean government was fully engaged with the process, and that while it is possible that future renewable energy additions might come in more expensive than earlier expectations, energy prices and a fall in the value of the Chilean peso have also raised the cost of fossil-fired alternatives.
There has not yet been an additional wave of securitisations of power receivables in Latin America, though the US and UK continue to see transactions that are designed to ease the financial woes of electricity distributors. But Chile suggests that the transaction structure is resilient enough – if a host government is reasonable enough.
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