Can you walk me through the strategy taken on Albanesi’s recent US$250mn 7NC4 deal?
We started in the power generation business in 2005, having acquired a huge power plant that is now owned by Pampa Energia, which operated under the oldest legal framework available to the energy sector. In 2006 the former government offered incentives to increase capacity, including enabling dollar-denominated contracts and private off-takers in the market, longer-term contracts, and a take-or-pay scheme – which means that as long as you are plugged into the system, you are paid whether or not you pump energy into the grid. When we began developing new projects in 2007, we were a much smaller company – with an EBIDTA of several million dollars roughly, and started funding those projects using project finance schemes, largely with large international banks. We also engaged in a few shorter term syndicated loans, in 2008, 2010, and earlier this year, though these typically carried a much higher cost at between 13-14% interest, shorter tenor, and came with collateral packages.
The latest deal will help refinance some of our debt, but will mostly help fund capacity expansion, as we are currently part of the new bidding process set up by the new government. We have a 3.5GWh deficit in the power sector, and we also need to add 1WGh per year as the country looks to grow, so the business context is very supportive for expansion. Taken together, this is why an international issuance makes sense. The cost of the bond was lower than our consolidated cost of funding, and helped improve the duration of our debt, from 3 to 7 years, and with a bullet payment. The main objective was to improve the current cost of debt – which is at between 11-14% all in, and had 2 to 3 years in duration. We secured 9.7% with no collateral package and a 7-year duration.
How did your expectations on pricing and investor uptake evolve during the issuance process?
We wanted to be as close to 9% as possible, but we were well aware of the challenges we would face here. We are a first-time issuer, which means there was an education process with global investors. Additionally, many investors are somewhat nervous when it comes to investing in the power business. We have a very good story to tell, but we knew it was going to be tough. At the end of the day, we had a solid book that swelled to over US$350mn, and half of the book was populated by a handful of accounts that have known or worked with us over the past 10 years.
What were some of the leading questions or concerns you heard from investors? How did you address them and drive the success of the deal?
The power generation business is not a straightforward market, with four different legal frameworks in which you operate. So it takes time to educate investors in how the market functions, and the onus was on us to educate investors in one week. Investors were primarily focused on understanding the energy industry in Argentina, and wanted to have a solid understanding of completion risk. We are seeing the fruits of those efforts in the secondary market, where our notes are trading at 9%.
Currency volatility is seen as a significant concern among international investors looking at Argentina’s credits generally. How did Albanesi mitigate this?
We are among the top 5 energy companies in Argentina, but the only one that has over 90% of its revenue generated in US dollar contracts, which is quite unique. So investors weren’t especially concerned about some of the currency-related challenges impacting corporates in Argentina currently.
Can you share some insight into how Albanesi chooses its relationship banks? What are some of the major criteria in play here?
If you asked 5 years ago, my answer would have been “the banks that give up the money.” But right now, the business is in a strong position and we are frequently solicited by leading lenders. We are currently engaged in project finance discussions relating to a deal through one of our subsidiaries, and we have for the first time held a competitive bidding process with a range of different banks. At the end of the day we want to work with the same banks that have stood by us over the past decade, and all else being equal – including pricing – we will go with the banks we know the best. But the process has shifted to become more competitive in that we consider pricing, speed of financing, collateral package, and tenor above all else.
What are some of the major factors influencing the company’s funding strategy at the moment? Can you shed some light on Albanesi’s growth strategy?
We operate eight thermoelectric power plants located in various provinces of Argentina, six of which we own including the power plant owned by Solalban, in which we hold a 42% ownership interest. These power plants have an aggregate installed generation capacity of 892 MW. All the power plants we operate are dual-fuel, using either natural gas or diesel oil or, in the case of GROSA, natural gas or fuel oil, and fully operational.
We are currently in the process of installing 450MWh, 210MWh to be added this year and the rest to be added between 2017 and 2018. In terms of financing, we are fairly comfortable at the moment. Next year we will need approximately US$50mn, and we know that the banks with which we have already pre-paid existing debt will want to come back to the table.
Argentina has gone through a significant political transformation over the past 10 months. Can you shed light on how those shifts have affected Albanesi? How have the electricity market reforms impacted Albanesi and the company’s financial outlook?
We see nothing but upside at this point. The previous government was not very market friendly. We know that any change with the current government is good news. The government is keen to move towards a more market driven model – with the power market specifically, the government is currently working on the pricing scheme and the rate of rises – and while there may be concerns over the timing of these reforms, they are moving in the right direction.
The price adjustments in the consumer segment are encountering both political and social resistance, which makes sense given the scale of the pricing increases – from between 200-400% this year, but it will happen. Over the past 10 years, the market has been broken and in terms of pricing, unsustainable.