Highway financing through development certificates
The Monterrey-Nuevo Laredo highway is an important transit route for trucks and cars in Mexico’s north-east that are looking to enter the United States through Texas. The highway includes a toll tract and a toll-free tract, each with different surfaces and speed limits.1 Pension funds are some of the most important institutional investors in the Mexican market, with funds under management growing from USD115 billion in 2011 to USD225 billion in 2020, equivalent to 17.5% of GDP.
- Low investor confidence following the Global Financial Crisis led to reduced liquidity in capital markets and difficulty raising finance for infrastructure projects in Mexico.
- The expansion of manufacturing in Mexico has placed greater pressure on its transport sector.
- Declining oil prices in mid-2014 negatively impacted the country’s budgetary position, leading to reduced government expenditure.
- Equity Development Certificates (CKDs) were created, which are structured through trusts created to issue and offer CKDs on the Mexican Stock Exchange. They have debt and equity-like characteristics.
- CKDs are specifically structured to attract investment from Afores, being tailored for governance mechanisms, ongoing disclosure, investor protection, and information confidentiality.
- To further facilitate Afores investment, regulatory amendments allowed for capital commitments instead of full prepayments for CKD investments, and for greater Afores ownership (from 35% to 80%) within the CKD structure.
- AINDA: Listed private equity fund in Mexico, with a specialisation in energy and infrastructure asset classes; funded by Afores.
- Afores: Companies authorised to manage retirement accounts in Mexico
- Ministry of Finance and Public Credit: Oversaw the creation of CKDs and regulates the Afores
Results and impact
- The first phase of CKD offerings, between August 2009 and July 2011, raised a total of USD2.9 billion, of which USD1.3 billion was committed to infrastructure.
- Institutional participation in the CKD market has continued, such as the acquisition of a 20% stake in the Monterrey-Nuevo Laredo project by AINDA Energía & Infraestructura (AINDA), a listed private equity fund that raises funds by issuing CKDs in cooperation with Goldman Sachs.
- Higher yields were achieved for investors compared to traditional equity or debt, such as the 9.97% real IRR for AINDA’s investment in the Monterrey-Nuevo Laredo highway.2
Key lessons learnt
- Tailored structuring of equity or debt instruments for specific types of institutional investors (such as pension funds) can attract increased investment, even when capital markets lack liquidity more broadly.
- Although listing securities on the public stock exchange may lead to increased reporting and regulatory burdens, it also provides for greater transparency and governance, which can encourage institutional involvement.
- Instruments such as CKDs may not only encourage investment in infrastructure, but other asset classes such as venture capital, private equity, and real estate.