There’s no need to offer any lessons on political upheaval in Peru to the operators of the country’s Jorge Chávez International Airport in Lima, the capital.
Germany’s Fraport negotiated the concession for the airport at the turn of this century, closing the deal shortly after former President Alberto Fujimori fled the country in November 2000 and was impeached. In December 2022, former President Pedro Castillo failed at a power grab and was promptly impeached. Fraport, with an 80% stake, and the IFC, the World Bank’s private sector arm, owner of the remaining 20% of the asset, closed on their most important project financing two weeks after Castillo’s ouster.
The financing not only coincided with political turmoil, but also the pandemic, which saw Peru’s shutdown for three full months in 2020, and the spiral in inflation and interest rates that took off in 2021. “My personal motto is to always expect the unexpected,†says Michael Schuett, Fraport’s vice president and head of finance.
Despite all the issues swirling around the project, Fraport persisted in upgrading the airport over the years; the $1.25-billion project financing it secured in 2022 grant it the resources to transform Jorge Chávez airport through the construction of a second runway, a new air traffic control tower and other facilities.
It was not only Peru’s largest financing in 2022 and the largest for an airport Latin America in the past 15 years (with the exception of Brazil), but also one of the most emblematic infrastructure projects of the past decade. The airport’s expansion is strategically significant for South America as well as for the international aviation industry more generally. But for Peru, it represents a milestone in the development of domestic infrastructure that will serve a growing economy for years to come.
The transaction, which wins the award for Infrastructure Financing of the Year – Latin America as well as Airport Financing of the Year, faced a number of hurdles in reaching financial close. “We started mandating our financial advisors in 2018, so before the pandemic, and the universe was completely different,†says Schuett. “Peru had elections and several presidents, and the market [at closing] had completely different interest rates [than in 2018]. There was always something new.â€
Aside from the prevailing political turmoil, the project was still reeling from the impact of COVID-19 and airport closures worldwide. To cap it off, the downgrading of Peru’s sovereign credit rating in early 2022 led to a meaningful contraction in credit appetite for Peru – a fact that limited the availability of commercial credit, especially for longer-dated debt of the magnitude required for the project.
Yet the complexity of the final deal, coupled with the project’s broader impact – not only for Peru, but for the wider southern Andean region – set it apart from other standout deals of that period.
“The closing of this financing was a landmark transaction for LAP,†says Pilar Vizcarra, chief financial officer for LAP. “Achieving this in such a difficult global environment, especially for the aviation sector has been a big challenge. It reflects the confidence of the banks in the experience of LAP and its shareholders to carry out this important project and operate a first-class infrastructure which will generate many sources of work and development opportunities for the country.â€
Japanese bank SMBC was sole financial advisor on transaction, joining a group of six other commercial lenders and IDB Invest, the IDB’s private sector arm, in providing the $1.25 billion, 7-year term loan, that paid off a $450 million bridge loan from 2020.
The transaction was structured and implemented over a two-year period and executed during a period of political and economic tumult. Schuett notes there were many moving parts – including complex intercreditor agreements – in dealing with eight institutions and a constantly changing market. Among the challenges was amending the loan to reflect the switch from a Libor-based to SOFR-based rate midway through the financial planning.
The incorporation of multilateral development banks as equity partner and lender, respectively, was crucial in getting the deal closed. Aside from IFC’s minority stake, IDB Invest anchored $250 million in loans – the largest ticket in the financing – giving additional comfort to commercial lenders that construction, traffic and refinancing risks were being adequately assessed and mitigated in a highly volatile investment environment.
When completed in 2025, the airport will have a second 3,480-meter runway, new 65-meter high control tower, vastly expanded domestic and international terminals, new logistical areas and array of auxiliary services, including hotels and shops.
The initial design is to move 30 million passengers and accommodate 120,000 fights annually. The airport received 18 million passengers in 2022.
While Jorge Chávez is the gateway to Peru, it is also a hub for the region along South America’s Pacific. The geography allows carriers to get big planes into Lima that cannot land in the mountainous airports in neighboring La Paz, Bolivia or Quito, Ecuador.
“One of the big advantages of Lima is that planes can land here fully packed. It is different if you fly to cities in the mountains, where maximum weight is lower. This increases the options carriers have to provide service to the region,†says Schuett.
