It's unlikely that crime and sickness have ever looked so good to Chilean ABS players, as a recent securitization of subsidies to build three prisons could infect others in the same sector and in hospitals. "It's a structure that could be replicated," said Cristian Fuenzalida, associate director of project finance in the Santiago office of Fitch Ratings. Fuenzalida added that the government is holding an auction on another prison soon and expects next year to start selling hospital concessions to private operators. "Others could use the same system" as the debut deal, he added.

Santander Securitizadora was the first arranger to cozy up to the corrections business. On Sept. 29, the securitizing agent led a three-tranche deal for Sociedad Concesionaria Infraestructura Penitenciara Grupo 3 that matures in March of 2017. Sized at 3.66 million inflation indexed units (UF) ($125 million), the A tranche priced at 3.5%. In total, the deal amounted to 4.14 million UF. On its national scale, Fitch rated the A piece AAA(chl)' and the B piece, worth 479,000 UF, A(chl).'

As the prisons underlying the transaction have yet to be built, the main risks are in the pre-construction and construction phase. These risks are mitigated in part by a performance bond provided by AXA Corporates Solutions Assurance, which Fitch rates AA' on the foreign currency global scale. The bond initially covers excess costs incurred by the construction company, Constructora VCGP Chile, for up to 22% of the contract. The concessionaire of the three prisons, known as Sociedad Concesionaria Infraestructura Penitenciara Grupo 3, is 51.01% owned by Constructora VCGP Chile and 48.99% by Constructora Vinco Chile. Both belong to a unit of Vinci, rated BBB+' on the foreign currency global scale by Fitch.

Mapfre Seguros Generales has also provided a variety of policies that cover catastrophic risk before project completion. Those policies, in turn, are re-insured by Munich Re and Hanover Re. Before the deal was launched, the Ministry of Public Works, which overseas infrastructure concessions, had already approved over 95% of the design plans submitted by Cruz y Davila Ingenieros Consultores for the three prisons.

The deal will finance the construction of a high security prison in Santiago and one medium security prison each in the southern cities of Valdivia and Puerto Montt. The Santiago prison is designed to hold 2,568 inmates, while the Valdivia and Puerto Montt facilities are planned with capacities of 1,248 and 1,245 prisoners, respectively.

The government construction subsidies do not kick in until after the prisons are completed. The estimated inauguration dates are next May for the Valdivia and Puerto Montt penitentiaries and July 2006 for the Santiago prison. Payments on the securitized bond have a grace period until 2007, which, at the current timetable, should come after all the prisons are up and running and receiving the construction subsidies. The trust has the right to receive 4.99 million UF in the subsidies, which are paid by the Ministry of Justice.

The deal does carry the risk that the government will fall behind in making payments into the trust. As Fitch points out in its report on the transaction, branches of government have, in the past, made late payments to suppliers. The Ministry of Public Works itself has missed payments for value-added tax on construction projects. The structure of the concession allows for a six-month delay in the subsidy payment.

To operate the prisons, the concessionaire has contracted Compass Catering y Servicios Chile, which is a unit of Compass Group. The performance of the operator, however, doesn't have much of a bearing on the securitization, according to a Fitch report. A government-imposed fine for poor service would have no impact on the subsidies flowing into the trust, which cover only the construction of the facilities. Government payments for operating the facilities are entirely separate.

Before the Ministry of Public Works instituted the current concession system, prisons were built by the Ministry of Justice in conjunction with Chile's Gendarmerie. With Chilean prisons overpopulated by an alarming 45%, the government decided to introduce a concession system for running the facilities privately, akin to the framework that had been in place for highways since 1992. The concession covers the design, financing, construction, maintenance and provision of services to prisoners such as food, laundry, health, rehabilitation and others. As in the past, the Gendarmerie still monitors and administers prisons.

The government is expected to start selling off hospital concessions to private operators next year. The scheme will be similar to that of prisons.

(c) 2005 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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