In a grim sign for potential airport deals out of Latin America, Moody's Investors Service cut the underlying public rating of the outstanding US$198.9 of notes due 2012 issued by the concessionaire of Chile's main airport, SCL Terminal Aereo Santiago. In a press release, the agency also raised the specter of a default down the road and subsequent trigger on an MBIA insurance policy. "Whenever there's a default in an asset category it may cast a pall on the entire sector," said Jeffrey Stern, a partner at Thacher Proffitt & Wood. "It may also reduce the appetite of the insurers."

This was the third time the stand-alone rating fell. Initially at Baa2, the December 1998 transaction dropped to Ba1 in December 2001, Ba3 in April of this year and B3 last week. Thanks to the MBIA wrap, investors - mostly buy-and-hold types in the U.S. - have nothing to worry about since the actual rating remains AAA from Moody's as well as Fitch Ratings. Salomon Smith Barney led the transaction in late 1998. The spread came at 237.5 basis points over Treasurys.

Moody's noted that company officials - the project is sponsored by Dragados, FCC, Vancouver Airport, Agunsa and Sabco - have said that a deficit in the second half of 2002 will force them to dip into a reserve fund to meet a US$12.3 million coupon payment due January. The policy could be triggered, Moody's suggested, with default likely "barring any significant positive trends in traffic and compensation measures from the Ministry of Public Works."

While some particularities of the deal - such as the lack of a monopoly by the concessionaire to provide certain lucrative services at the airport - curbed revenue, global forces were at play as well. The international drop in tourism post-Sept. 11 cut into income, as did the devastating recession in nearby Argentina.

For these reasons, Santiago may hold relevance for other Latin American airports eyeing the international markets, such as the Dominican Republic, with its US$170-million Aerodom transaction led by Italy's Banca IMI, and Ecuador, which sources say has nothing concrete but is certainly sniffing around.

With Santiago, "the fundamentals of the revenue stream were among the problems," said Adam Whiteman, a senior vice-president at Moody's.

Like Santiago, airport deals are likely to continue straddling the line between project and structured finance, leading ratings agencies to pool talent from different departments. "Financing the airport industry in Latin America is in its very nascent stages," Whiteman added. "Some of those deals will benefit from elements of a traditional structured approach; others may not. It's an evolving market and each country is making its own determination as to what's the best course for financing."

Not all airport deals south of the Rio Grande are faring as badly as Santiago. Sources say that a Ps750 million (US$74.3 million) airport trans-

action from Mexico's Fumisa has been in cruise control since it

hit the markets in December of last year. Santander Investment priced that deal at 150 basis points over six-month Cetes, not bad given that Moody's Investors Service and Fitch rated the transaction double A' on the national scale, sources said. Fumisa holds a 20-year lease contract for the construction and operation of the new international terminal at Mexico City's main airport. In exchange for building and renewing the installations, Fumisa acquired the rights to sublease and commercially exploit an area of offices, counters, VIP lounges and other spaces.

In some ways, Fumisa's transaction will be difficult to replicate, particularly in regards to the denomination. Most Latin American domestic markets lack the depth to absorb the massive capital requirements of infrastructure projects, sources said. The overwhelming appeal of dollar funding will hold.

One dollar-denominated deal approaching liftoff is Aerodom's US$170 million transaction, backed by revenues from six airports (see ASR 8/12). Lead Banca IMI is still resolving some issues before striking, say sources familiar with the deal. Marketed to European investors, that deal features a wrap from XL and a political risk guarantee from Inter-American Development Bank (IDB).

Sources say that, as a multilateral enhancement, the IDB guarantee may face tighter scrutiny among investors following the World Bank's decision to let Argentina repay a US$250 million guarantee payment on series D zero coupon notes with four equal semi-annual installments beginning October 15, 2005. That vastly diminishes the incentive for Argentina to meet a 60-day deadline to reimburse the World Bank and roll over the guarantee to an E series, sources said. Following the move, S&P lowered its rating enhancement on three deals that benefit from partial rolling guarantees from the World Bank. Though this may signal the death of partial guarantees, most sources say Aerodom's enhancement from the IDB is different enough that the Dominican deal should be ultimately unaffected. "Once all of this blows over with the World Bank, people will see that it isn't relevant [to Aerodom]," one source said. "There are other types of multilateral guarantees besides this one."

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