Mexico City’s subway is one of the busiest mass transit systems in Latin America and Line 1 is its heart, moving around 245 million passengers annually.
Modernizing the line while it continues daily operations is no easy task, but it might seem simple compared to the work required to close financing on this iconic project.
Despite the challenges, China’s CRRC, the world’s largest supplier of rail transit equipment, is taking all the obstacles in its stride.
“This is our first transaction in Mexico. It was one of the largest project financings of its kind and there were many things that were new for us," says Hong Chou, deputy general manager for CRRC’s Mexican subsidiary, MEXIRRC.
The nearly $660 million loan – significant in size for the Mexican market – involved five banks, including international banks BBVA, Sabadell and SMBC, as well as Mexico’s private Banorte and the public Banobras. Sponsors opted for a project finance structure to limit shareholder liability to project equity.
Hong says among the novel aspects of the financing for the Chinese developer – aside from being its first foray into Mexico – were the combination of international, local and development banks and the take-out of a bridge loan via a larger syndicated facility. “We were not used to working with so many banks, Hong says. “These were very new things for us.”
To add to the complexity, payments under the public service contract are supported by Mexico City’s federal income via a complex web of trusts (fideicomisos) designed to administer funds – a fact that required lenders and advisors familiar with the public funds system.
At the same time, the interest rate environment complicated the financing further. Says Antonio Borja, a partner at Mexico’s Galicia law firm who advised on the project: “Interest rates and inflation were going up and up as we were closing, which became a big point. It was very challenging to close the swaps and the hedges because of interest rates.”
Moreover, as this was CRRC’s first project in the country, part of the challenge lay in adapting to local project finance standards. The multi-jurisdictional nature of the financing – with shareholders incorporated in China and Hong Kong – added further complexity to the deal.
Hong says that the project was conceived to meet important ESG criteria by reducing the time between trains, replacing antiquated trains and making the system safer. It is also reducing emissions by 20% through greater efficiencies.
The project will increase the number of trains per hour to 36 from 30, modernize stations and rails, and install new communication and signal systems.
“Improving transportation capacity means that people will have a better experience,” says Hong.
The Mexico City project has also opened the door for CRRC to take on new projects. The company won the public-private partnerships for two new mass transit projects, including construction Line 1 of Guadalajara’s light rail and Line 4, 5 and 6 of the Monterrey’s Subway system.
Sponsor: MEXIRRC S.A. de C.V
Banks: Banobras, Banorte, BBVA, Sabadell, SMBC
Law Firms: Galicia, Grandall, Pinsent Masons, Ritch Mueller
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