A deal due out next month in Uruguay comes with a structure that's as baroque as it gets in Latin America. To maneuver around obstacles - including a regulatory prohibition on pension funds' buying straight future flow deals - sole lead Banco ACAC Credit Agricole engineered a number of steps for a US$8.4 million deal that, according to one source, led to steep, albeit unavoidable, costs.

The originator of the transaction is Grinor, a construction company that won a concession last January to build and maintain an extension of a street in Montevideo, Bulevar Jose Batlle y Ordonez.

The structure-heavy transaction kicks off with the trust selling Participation Certificates (PCs) backed by government securities to local pension funds, according to a report by Fitch Ratings. The government securities remain in the trust.

The trustee, also Banco ACAC, then extends a revolving bridge loan to Grinor for up to US$1.5 million, in exchange for notes from Grinor (called "NGs" here for simplicity's sake) that are, in turn, backed by promissory notes and other receivables owed by the municipality of Montevideo to Grinor. Once the loan reaches US$1.5 million, the trust buys the corresponding NGs from ACAC. As the trust collects the NGs - which replace the government securities backing the PCs - it will issue bonds that will be swapped with the PCs held by pension funds. The final bonds will have the same terms and conditions as their underlying collateral, the NGs.

The obligations backing the NGs include expropriation payments and payroll taxes as well as future receivables linked to usage fees payable from the municipality of Montevideo to the originator.

Once the construction phase is over, the flows from the future usage fees will replace those from other obligations owed by the municipality, changing the composition of the asset pool. With this innovation, the structure avoids being a future flows deal.

As drivers on the road will not be subject to tolls, the municipality will pay Grinor US$0.33 per vehicle under an arrangement known as "shadow tolls." Once the road is in operation - in an estimated two years - Montevideo will deposit 72% of the tolls to the trust and 28% directly to Grinor, as long as certain conditions are met. Road sensors at three different sites will gauge traffic flow.

The evolution of the structure over the life of the deal is in part a creative response to a prohibition on future flow structures under a Uruguayan trust law implemented last December. But even without that obstacle, the construction risk would have resulted in a structure that pushed the receivables portion of the pool further into the future. "The construction risk was just too high," said a source familiar with the transaction. "This transfers more of the risk to the municipality, which is where we want it."

Fitch has rated the deal A+(uy)' on the national scale. One of the factors constraining the rating is the potential mismatch between the rates of the underlying assets and that of the final bond. That risk is highest during the construction phase, the agency noted. Local firm Guyer & Regules provided legal counsel.

The maturities of the tranches will vary from 10 to 14 years, while the concession remains in effect for nine to 16 years.

Grinor won the concession in December 2003 with a bid estimating the net present value of revenue from the project at US$12.8 million. Under the term of the deal, the municipality has pledged to generate enough shadow toll revenues to reach the NPV in no less than 16 semesters and no more than 28 semesters from the date of operation.

Created in 1993, Grinor has averaged annual revenues of US$6.5 million over the last five years.

The high costs of the deal may prove a deterrent for other construction deals in Uruguay, said one source. "Any other construction project is going to run into the same problems," he said.

Banco ACAC has two other recent securitizations under its belt: one last year, for milk producers, and another, this year, for rice farmers. Neither came under the new trust law.

Copyright 2004 Thomson Media Inc. All Rights Reserved.

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