As announced during President Enrique Peña Nieto’s state-of-the-union speech in September 2015, Mexico is launching a new energy and infrastructure investment vehicle known as the Fibra E. The new instrument aims to meet one of the country’s current financing challenges. Despite being ready to move on a wide range of major, long-term and profitable infrastructure projects, Mexico faces a short-term squeeze on public sector capital expenditure due to fiscal austerity triggered in part by low oil prices. The Fibra E is designed as a new way of attracting private investors to help bridge the financing gap.
The vehicle is a hybrid that draws on two US financial products: real estate investment trusts (REITs) and master limited partnerships (MLPs). Mexico adopted its own version of REITs in 2001, under the name fideicomisos de infraestructura en bienes raíces (Fibras). Although launched at a time of economic difficulty, the Fibras went on to prosper, and to date are estimated to have raised some $17.5bn worth of funds for the real estate sector. It is hoped that the Fibra E, also launched at a time of austerity, will perform even more strongly for energy and infrastructure. International consultancy E&Y estimates that the Fibra E could raise as much as $70bn over the next five years.
The Fibra E is a modified Fibra that also incorporates tax-efficient features of MLPs. In the US MLPs are tax-exempt publicly traded companies that own cash-generating energy and natural resource infrastructure, and pay back income in the form of “distributions” ( dividends). While full details of the Fibra E have yet to be finalised, these trusts are designed to allow private investors to put money into “mature” cash-generating projects in Mexico, particularly (but not exclusively) those in the public sector.
Fibra E certificates will be freely traded on the stock exchange. State energy companies like the oil company Petróleos Mexicanos (Pemex) or the Federal Electricity Commission (Comisión Federal de Electricidad, CFE) will be able to fund some of their existing projects through Fibra Es, hopefully releasing much-needed capital resources for new projects. This is of key importance as Pemex and CFE face budget cuts in fiscal years 2015 and 2016. The emphasis on existing projects means there is a track record of income generation for the investor to analyse and risk levels are comparatively lower. A range of public-private projects, including roads, bridges, pipelines, ports, airports, telecoms networks and water and sanitation systems will be eligible for Fibra E financing.
Lewis Cohen, a partner at the Hogan Lovells law firm in New York has commented, “The Fibra E is a major step forward for the Mexican capital markets, completing 2013’s constitutional reform of the energy sector.” Enrique Ochoa Reza, CFE’s director-general, has already announced that the company is making plans to raise MEX10bn ($673m) through Fibra Es for a project backed by power transmission lines. It is estimated that the first Fibra E certificates will be trading on the Mexican stock exchange in the first half of 2016. Big private sector Mexican contractors, including ICA, Pinfra, Ideal and Ienova, are also reported to be looking at financing via Fibra Es.
Rules & Exclusions
Analysts recommend careful assessment of the Fibra E regulations as there will be differences with MLPs. Fibra E trusts may buy shares, but will only be allowed a minority interest in entities. Fibra E trusts will be run by technical committees, with fewer powers than a board of directors. Projects covered by Fibra Es must already be running, and investment in upstream initiatives (for example, hydrocarbons drilling, exploration and production) is excluded.
“We think that an education process will be necessary for both Mexican and international investors,” Cohen said. Although the energy reforms have been approved, he added that there could be some remaining political resistance, “if the private sector seeks to move too quickly to put former government-owned energy related assets into private hands.” But the overall outlook for Fibra Es is undoubtedly promising.