Energias de Portugal, the country’s dominant electricity group, recently agreed to pay Goldman Sachs $2.2bn in cash for 100% of Horizon Wind Energy, a leading US utility. It was not only the world’s biggest renewable energy deal to date, but also the largest acquisition ever made by a Portuguese company outside the Lusophone world.
In the same way that Portuguese companies are moving with increasing boldness into overseas markets, financial groups are expanding the share of their investment banking business that comes from outside Portugal, not just in financing international mergers and acquisitions by Portuguese corporates but also in project finance, debt issuance, brokerage operations and private equity deals.
“The Portuguese economy is relatively small and we have to go outside our borders to continue to expand,” says António Guerreiro, chairman and chief executive of Banco Finantia, an independent investment bank. Finantia, which recently completed a €100m capital increase to support expansion, already derives more than half its income from outside Portugal.
Cross-border view
Caixa-Banco de Investimento (CaixaBI), the investment banking arm of state-owned Caixa Geral de Depósitos (CGD), Portugal’s biggest bank by loans and deposits, is also looking overseas for growth. “All investment banking today has to be seen from a cross-border perspective,” says Jorge Tomé, its chief executive. “Business opportunities in Portugal are becoming increasingly limited and we are projecting ourselves more and more into overseas markets.”
This is particularly true for project finance, which accounts for the largest share of CaixaBI’s income. In 2006, the bank, in association with CGD, was the mandated lead arranger for 14 European project finance loans totalling $1.54bn, putting it in sixth place in the European project finance ranking.
Three years ago, the bank launched an operation in Spain, focusing on project and acquisition finance. Having built up strong relations with leading Spanish infrastructure companies, it is now competing with them for contracts in the US and Brazil and has also found business in Italy and Greece.
“The US is an important developing market for project finance, which is a relatively new instrument there and with which US banks do not have a great deal of experience,” says Mr Tomé. “We are using Spain as a springboard into the US and other markets. This could lead to the opening of offices in the US, Brazil and possibly Angola, where the parent group is negotiating the purchase of a commercial bank.”
In Portugal, business is focused on refinancing existing project finance deals initiated about a decade ago. At a time when the country was launching its first public-private partnerships (PPPs), many of these loans were made at relatively high rates. This has been positive for banks and does not affect the operating consortiums. But it has proved expensive for the state. A study by CaixaBI estimates the government can gain between 40 and 50 basis points a year by refinancing these deals, which, as Mr Tomé puts it, represents “a great deal of money”.
In return for refinancing the operations at lower rates, the length of the concessions granted to the operating groups will be slightly increased. They will also be allowed to increase the level of leverage. Most of the contracts involved are for motorways, other transportation infrastructures and energy installations
Cruising along
“These projects have reached cruising speed, the level of demand is high and they are earning more than the projected base scenarios,” says Mr Tomé. “This means the level of leverage could be increased, for example from 80% to 90%.” The refinancing is to be made through monolines, securitisation and bond issuance.
New domestic PPP projects are also in the pipeline, the biggest being a new Lisbon airport, which is expected to involve a total investment of at least €3bn. Citigroup has been retained by the government to advise on the financial model for the project, which will also involve the privatisation of Ana, Portugal’s airports operator.
Analysts say funding could come from several sources including proceeds from the sale of Ana, project finance and equity, as well as both Portuguese government and EU grants, which are expected to account for at least 30% of total costs.
Plans to construct two high-speed railway connections, Lisbon-Porto and Lisbon-Madrid, are expected to involve a total investment of more than €7bn and could involve a new bridge over the Tagus river. “This is a very important project for Portugal and there will be a significant involvement of the financial markets both in an advisory capacity and in financing,” says Paulo Gray, Citigroup’s country officer in Portugal.
Leaseback possibilities
More motorway and energy projects will continue to provide business opportunities for project financiers in Portugal. In a new development, the government is also considering selling state-owned real estate to private companies and renting its use for public services, in a leaseback arrangement that will involve bank finance. A PPP programme for 10 hospitals was announced three years ago, but only one contract has so far been adjudicated. In Spain, where a similar programme was announced at about the same time, all 10 hospitals are already under construction.
After more than a decade of experience in project finance, Lisbon government authorities are more demanding about transferring risk to the private sector. At the same time, the risk criteria applied by Eurostat for PPP agreements to qualify as off-balance sheet in terms of government spending have grown stricter. The increased rigour, however, is unlikely to dampen investor appetite.
“There is a huge amount of capital in the market ready to invest in these projects, either through infrastructure funds or debt issues,” says Mr Gray, who is also Citigroup’s senior government banker for Portugal. “If ever there was a time when the private sector was willing to assume risk, it is now.”
Covered bond
Investor demand was also strong for Portugal’s first covered bond issue by CGD at the end of last year. The bank sold €2bn of the mortgage-backed bonds out of an initial programme that is expected to raise €10bn over the next few years. The sale, which was led by Barclays Capital, was fully subscribed within three hours.
The sale came only a few weeks after Portugal published secondary legislation completing the enactment of its covered bond law (Decree law 59/2006). “There was close collaboration between the central bank, the finance ministry and the banking sector in drawing up the new legislation, which benefited considerably from the experiences of other countries,” says Mr Gray.
CGD and other institutions are expected to issue more covered bonds this year. In addition to mortgages, bankers say public sector assets such as loans to municipalities and state-owned companies could also be used as collateral for future covered bond issues.
For more than a year M&A activity in Portugal has been dominated by Sonaecom’s €11.6bn bid for Portugal Telecom, which collapsed in March, and Millennium’s BCP’s €4.3bn bid for Banco BPI. But investment bankers are expecting a new wave of consolidation among medium-sized companies as economic recovery strengthens business confidence.
“Private equity deals are only just beginning to make an impact in Portugal and can be expected to generate a deal of business,” says Mr Tomé. “There is now great potential for the growth of M&A activity.”
