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Mexico Energy Reform: Fibre E -- finally!

More than four years ago one aspect of Mexico's energy reform that was unanswered was the ability to finance some of Mexico's state monopoly's infrastructure requirements. Using the electric grid as an example -- especially since assets are difficult to identify and legally cannot be segregated -- the capital requirements (transport, distribution etc) implied massive investment that CFE was ill-equipped to meet, as its balance sheet is already under heavy strain. Moreover, as per Mexican law, it is impossible to segregate assets or create liens against specific assets owned by either PEMEX or CFE (although the former is allowed to sell some of these assets).
In comes, the Fibre-E structure (Investment Trust in Energy and Infrastructure, is its full name), which is a listed instrument (on the Mexican stock exchange) that allows the participation of private capital into public infrastructure. Many commentators use a US structural analogy of an "MPL" (used in the real estate segment) is, I believe, incorrect. It is incorrect because there is a concept of ownership in the MPL that simply doesn't exist in the Fibre-E structure.
Now, the instrument is somewhat limited in its ability to be used for "building new assets" in fact no more than 25% of a Fibre-e can be used for greenfield project -- the rest has to be on "mature assets". In fact, a 25% of greenfield project is, in my opinion, high, Fibra owners are looking for known cash flow with limited risk -- construction risk is not a risk usually associated with "utility like returns".
Fundamentally, the Fibre-e structure allows taxpaying investors to participate in a pre-determined income flow for a pre-determined term and with specific limits in terms of overall participation in the identified assets' cash flow. As an example, a recent Fibre-e structure allowed the trust investors (because the Fibre-e is a trust structure) to participate on a sharing basis with CFE up to 150% of the planned income, on the building of a new powerline.
This may sound unattractive, but for tax paying investors it can be a very attractive income stream and allows CFE to finance its projects. Although these are listed instrument they are more like debt instruments with some upside potential (it pays to read the fine print, since this will change from instrument to instrument). The reason such instruments are attractive to investors is simple: The income is that of a utility, which faces constraints on prices and returns but is sufficiently high to meet all their financial and operational requirements. CRE (Mexico's regulator) will look at CFE's revenues and rate requirements based on capital and operational costs. This makes the return a sure thing. Equally the issue of security is less important because no one can obtain a lien against the assets of CFE.
Is there a lot of demand for such instruments? An excellent question, I suspect that yes it will be very attractive, because of the size of the offering (the equivalent in MXN of US$ 875 million) it should become very interesting instrument for those wanting to take LatAm exposure (the Mexican Peso is the 8th most traded currency, but is by far the most traded "emerging economy" currency and is a proxy currency for a lot of LatAm exposure). If the size of the instruments are large enough (for liquidity purpose) and the float is substantial (that assumes that the first issue was well priced) then this could become the de facto instrument for foreign investors looking to hold LatAm or emerging economy exposure with very little volatility.
The other side of the coin of limited upside is also a limited downside because CFE is a utility, there will be stringent rules for distribution and profit participation, and CFE has already indicated that it will be a favored tool for project fundraising.
However, should it play the role I suspect in terms of LatAm exposure seekers then the volatility of the instrument will be more closely related to the overall investment appetite for LatAm risk? The two aspects of the new instruments are, therefore, the ability of taxpaying investors to take a somewhat higher yield, lower volatility and with possibly better liquidity than bonds or equities (especially an issue on the Mexican market). The first issue is certain to become a benchmark, the others -- only time will tell. The only way to reduce the volatility of Fiber-e will be for CFE to use the tool aggressively, with a steady and well-priced yield, that will ensure that demand and supply will face less risk from speculative F/X investors looking for a safe haven asset.
One aspect that I alluded to is that this is specifically crafted for taxpaying investors since although it will be transparent (for tax purpose) the income will be taxable in Mexico (that means that this instrument is not suitable for pension funds). In the future, there is nothing stopping the Mexican government from creating a tax spared instruments that will meet the pension fund investor universe. Right now, there is so much appetite for infrastructure investment from tax paying investors, I am confident that demand will outstrip supply.

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