Three intricate transactions

No matter how fast they go, reforming, counter-reforming, or over-reforming takes time. After the 2013 constitutional reform on energy, it took more than a year and a half for Round One of the oil auctions to be held. It took more than two years for the first long-term electricity auction.

In the most recent wave, it's been several years since the government announced its initially unsuccessful intentions to implement counter-reforms in favor of the "prevalence" of state-owned enterprises (although promising not to discourage investment). It remains unclear how new investments in new productive capacity will operate in the Mexican energy sector. Some draft regulations are already circulating. There are also various hypotheses regarding the new form of mixed contracts, especially on the oil side. But nothing concrete on which to base investment decisions in new projects. The energy infrastructure deficit in Mexico continues to grow; we'll have to wait a little longer.

For now, the sector's defining activity is the secondary market and financing for Pemex. The three most notable milestones are Iberdrola's two major portfolio acquisitions and the issuance of P-Caps. Together, they represent the mobilization of more than $20 billion. Each, especially the acquisitions in the electricity sector, has created new leadership positions within the sector, reconsolidating assets under innovative structures. From the buyer's perspective, all three are quite intricate.

The acquisition of Iberdrola's first block of generation assets is one of the largest transactions in the history of the Mexican energy sector. It resulted in the consolidation of a new platform that combines government investment, capital markets investment, and private equity in a rather unique way. The initial capital structure, which leveraged both Fonadin investment and cumbersome bridge loans from banks, was eventually replaced with a more permanent structure, anchored around the $4.5 billion issuance by FIEMEX, with broad participation from seven Mexican Afores and even INFONAVIT. Mexico Infrastructure Partners (MIP) acts as manager of FIEMEX and, for practical purposes, as the private equity backer of Quantum Energía. It comprises 13 generation plants, representing almost 10% of the country's total installed capacity. Nearly two-thirds of the capital comes from the Mexican government, under one of the forms of "prevalence" that some expect to become more prevalent in the market.

The acquisition of Iberdrola's second asset package is complicated for other reasons. The bottom line is that Cox Energy, the buyer, has so far invested less than €50 million to acquire a portfolio worth more than €4 billion. There are more than $3 billion in loans and a capital fundraising effort still pending, with institutional and individual investors behind it. This structure, also quite intricate, has allowed Cox to leap from emerging player to the big leagues of the sector, eventually operating assets representing 2,600 MW. It's a significant piece of one of the largest sectors of the economy, with a down payment of less than 1% of its value. Another spectacular deal.

Last week's P-Caps issue is also quite ingenious. It was a debt issuance that allowed the Treasury to support Pemex in an indirect but effective way, circumventing the legal prohibition that the government cannot directly assume Pemex's debt. Without boring you with the details, Mexico used a special-purpose vehicle (an entity called Eagle Funding LuxCo) to issue debt and used the proceeds to purchase a portfolio of U.S. Treasury bonds. The funds raised, $12 billion (making this one of the largest single-tranche structured bond issues in history), will be used to pay Pemex's financial obligations and debt amortizations. Thanks to the baroque structure, the financing terms are much better than what Pemex would have obtained on its own.

These are three intricate transactions. All three have enormous financial merit—major case studies in global investment banking from the outset. If certain conditions are met, all three will also have potential as enablers of operational and energy success. But they also raise perhaps important questions. Why is what defines the sector starting to become so financially intricate and so heavily dependent on catapulting leverage? Is there anything here worth repeating or replicating? Can Mexico return to the financial mainstream, where plain vanilla project financing allows for the deployment of another enormous amount of resources, but now to build and renew the infrastructure that generates, transports, and distributes energy in our country?