7
may
2014
infrastructure
investor
For Mexico, the building of the
NET Mexico pipeline (scheduled
to begin service in December 2014)
is enormously significant. The 124-
mile pipeline, after all, gives the
country access to the US’ huge shale
energy reserves – linking as it does
to the Eagle Ford shale oil field in
Texas.
But for the project finance
market also, the transaction could
be a seminal development. Certainly,
in the North American context, a
huge number of pipelines need to
be built to take shale gas and oil
from the production sites to the end
consumers (whether the whole way
or part of the way). NET Mexico
showed that project finance may
have a big role to play in this process.
In making its submission, joint
lead arranging bank BBVA said:
“The majority of pipelines built
in North America are not project
financed so the NET Mexico transac-
tion has shown that, with the proper
contractual structure in place, it is
a viable alternative to on-balance
sheet financing of the nation’s
pipeline infrastructure by industry
sponsors.”
But, given that it was a break-
through deal, how was it achieved?
In a nutshell: by taking risk that
lenders would not normally take
at the construction phase. For one
thing, the project – unusually – does
not have a single fixed-price date-
certain EPC [engineering, procure-
ment, construction] wrap. Moreover,
some of the contracts were to be
executed post-financial close for
equipment or services relating to
later stages of the project.
In addition, not all rights of
way necessary for laying the pipe-
line were secured at financial close.
Instead, the lenders relied on asset
operator NET Midstream’s experi-
ence of local laws and regulations
governing procurement of rights of
way to achieve completion of the
project on time and within budget.
By BBVA’s own admission, using
a short-term solution to bridge a
construction project to the opera-
tional phase and eventual capital
markets refinancing is not new. But
to take construction risk without a
standard EPC contract is a rare (and
bold) step.
In taking that step, BBVA and
other banks involved in the project
received a round of applause from
the judging panel. In their view, the
way to a fully revived project finance
market lies in just this kind of lead-
ing from the front.
n
NET Mexico showed pipelines could be
successfully project financed with a flexible
approach to risk
Going out on a limb
BANKING AWARDS FOR EXCELLENCE 2013
NET MEXICO PIPELINE PARTNERS
Category:
North American energy
Winner:
NET Mexico Pipeline Partners
Nominated by:
BBVA (joint lead arranger)
Other participants included:
NET
Midstream (transaction sponsor,
90%); MGI Enterprises (Pemex)
(transaction sponsor, 10%); Pemex-Gas
y Petroquimica Basica (off-taker); The
Bank of Tokyo-Mitsubishi (joint lead
arranger); ING (joint lead arranger);
Credit Agricole (joint lead arranger);
Natixis (joint lead arranger); NordLB
(joint lead arranger); RBC (joint lead
arranger); Grupo Santander (joint lead
arranger)
Date of transaction:
6th December 2013
Size of transaction:
$728m
“It’s interesting what was not in place – no
fully fixed price contracts, no full rights of
way etc. This was brave; it showed open-
mindedness for the banks to take more
of the risk of the project rather than laying
everything off.”
“This has opened up the non-traditional
market by the banks showing flexibility
when it comes to risk. If banks are
prepared to take more risk, they can do
more of these types of deals.”
Honourable mentions in this category:
NET Mexico was seen as the clear
winner. “Many of the other contenders
appear to be fairly standard, ‘off the peg’
solutions,” said one judge. “Whereas
NET Mexico could lead to replications,
most others are themselves replications
of what others have done.”
WHAT THE
JUDGES SAID:
