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Growing The Latin American Infrastructure Footprint

ISA President and CEO Bernardo Vargas speaks with Bonds & Loans about new areas for growth in Latin America’s infrastructure markets

Jul 11, 2016 // 4:47PM

Bernardo Vargas currently serves as President and CEO of Interconnection Electric S.A. (ISA). Mr. Vargas has been principal member of ISA’s Board of Directors since 2012. As a founding member of independent investment bank Nogal, he has led several major funding and M&A transactions. He also served as chairman of ING Barings in Colombia; he was director of the Andean Region and, subsequently, he was appointed as President and CEO for the merging operations of Barings and ING Colombia.

Can you give us a sense of ISA’s footprint and strategy?

ISA is one of the largest companies involved in power and telecoms infrastructure. We have over 42,000 km of power lines in Latin America, and one of the largest holders of toll road concessions in Chile. In telecoms we have significant fibre optic ring infrastructure that spans the entire region, starting in Colombia through to Peru, Ecuador, Argentina, Chile, Brazil, and back through Colombia. We also have a substantial underwater cable network that was acquired from Telefónica.

In those three business, there are a broad range of challenges associated with keeping the portfolio healthy. But an added dimension of complexity comes with the fact that we operate in 8 countries in the region. Our big challenge ahead is maintaining a portfolio that is diversified in a way that reduces risk and increases returns.

That’s no small feat, particularly given the current environment and the diversity of sectors and countries in which ISA operates. Can you give us some insight into how the company is positioning itself to achieve those objectives?

In the past, ISA grew by virtue of being present in many countries and having a portfolio of assets that was relatively diversified, but with slightly less focus on returns. Now, nothing will be done unless it passes a higher profitability threshold.

We are also probably willing to divest assets that are not producing the returns we are looking for, and acquire new assets that we need in order to enhance returns; this extends to both greenfield and brownfield acquisitions. We are growing in terms of bid participation – we are currently active in bidding for rights within all of the countries we are active in, particularly for new transmission lines in Peru, Colombia and Chile.

In another shift from our past, we are now open to more partnerships with a broader range of stakeholders. Historically, we haven’t tended to partner with many firms – with the exception of continuing existing partnerships on transmission assets we have purchased in Brazil and Peru in previous years. We are looking to partner with long-term investors like pension funds, who can help play a role in larger projects and who are seeking a strong industrial partner in the region. And, we are also looking at partnering with companies that are similar to us, companies that might be interpreted as our competitors – but that can help share the risks involved with, and the spoils of, large projects. It’s something we haven’t been as open to in the past, but something I believe will be critical for our growth moving forward.

We are being very careful with greenfield projects in the sense that we’re paying extremely close attention to the way we’re structuring projects, and how they generate returns for the business. In that sense, we’ve strengthened our engineering teams and strengthened our project financing teams. To complement that, we’re also looking to bolster our acquisitions strategy; we’ve recently hired a Head of Business Development who has a banking background with a focus in M&A.

And geographically, what is ISA’s focus this year, and what are some of the drivers there?

So far, we have a significant presence in Brazil, Peru and Colombia; we are growing in Chile; but we have a very small presence in Argentina. Our initial push will be to bolster our presence in the countries we already have a strong presence in because we have existing synergies, human capital, and other resources in place. In Brazil, we have a bit more caution, which you might expect given the situation evolving on the ground there.

We are looking very closely at Argentina because we think there is huge potential there – the change in government there is the main driver behind our shift in focus. Mexico is also hugely important for us, not the least of which because of the energy reforms that were passed a couple of years ago. Those reforms took a bit longer to translate into significant opportunities, but we are confident that this is changing.

Argentina seems to be gaining traction among investors and large corporates in the region. Is this translating into new opportunities for ISA, or is it too soon to tell?

In Argentina the story is a bit different. The country’s new administration is still very much in the ‘housekeeping’ phase of policymaking, trying to push through a series of orthodox policies designed to return the country’s economy to a strong position, and recapturing interest from international investors. It will take some time before many of these reforms translate into new opportunities for ISA among others, but we are certainly keen to get in front of this – we have a team dedicated to tracking opportunities there.

I get the sense that notwithstanding some exceptions, the state of the banking sector and capital markets in much of the region is depressed. Has this impacted ISA’s funding strategy?

The climate is certainly more volatile, but the biggest challenge for ISA in terms of funding has always been Brazil. Local banks in Brazil do not seem to have the agility or competitive dynamics pushing them to offer attractive financing options for almost any industrial company.

In other countries, we haven’t encountered as many challenges, and are still relatively optimistic. In Chile, for instance, we’re building a 1,000 km transmission line that we funded with a US$700mn club deal that closed earlier this year and included a mix of local, regional and international banks. We have a number of bonds in the Peruvian market, and along with the rest of the market these are performing quite well. Earlier this year we issued a US$90mn bond in Colombian market, which seems to be performing quite well.

The volatility we’ve seen in the currency markets is a concern to an extent, but as a company we place a strong emphasis on minimising currency risk exposure by matching our revenues and debt; the natural hedge has helped insulate us from some of the challenges other companies in the region are experiencing.

Overall, we have secured all of the funding needed for 2016 and part of 2017. There might be a window of opportunity opening for us to tap the market in September before finishing the year, but this will probably be bank driven rather than bond driven, due in part to pricing considerations and the structures we could be looking for.

Americas Projects & Infrastructure

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