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New vehicles for infrastructure investment

Seeking to close an infrastructure investment gap, several countries offer high-yield bonds and government backing to private investors.

Even after several years of record economic growth, underdeveloped infrastructure remains a challenge to Latin American economies in realizing their full potential.  As such, Latin American governments and private companies will seek to fund much-needed infrastructure improvements this year in a bid to bolster the region's physical capabilities.


Several experts observe these improvements will make public and private bond issuances to support these projects a natural move, especially given high commodity prices and a growing middle class in the region. 


In Colombia a new public-private partnership law went into effect in February, which should pave the way for privately financed and privately constructed projects to be built with government backing. Government involvement will provide backstop guarantees that will make these bonds attractive investments on international markets, despite moderate yields and cautious investors.


Colombia has "a significant amount of toll road assets and rail assets that are going to come online that are going to be financed, very likely, in both the local markets [and] in the international markets," said John Haley, a partner at law firm DLA Piper specializing in international mergers and acquisitions. "A lot of international investors don't have a lot of appetite for construction risk and with a public-private partnership you almost make the project the equivalent of a country risk." That is not all bad news as Colombia is an investment grade country.


In Brazil BTG Pactual - the investment bank led by billionaire Andre Esteves that arose after BTG took over UBS Pactual in 2009 - has launched two funds aimed at investing in infrastructure projects in the region's largest economy. Billions have already been spent across the country in preparation for the 2014 World Cup and the 2016 summer Olympics. The latest fund, which is valued at more than R$3 billion (US$1.75 billion), will invest in roads, rail, ports, airports and other projects, according to Bloomberg News.


Region-wide, the Inter-American Development Bank estimates an annual $200 billion gap in infrastructure investments and has started looking to the private sector to fill it.  Last year, rating agency Standard & Poor's rated a record number of project or infrastructure bonds with 25 issues; in the initial months of this year it has already received requests for ratings on 15 similar bonds, says Reuters.


Meanwhile corporations in a number of high-growth industries such as oil, mining and heavy manufacturing are expected to turn to international markets for financing large projects instead of banks.


Expect corporate issuances geared toward investors looking for yields beyond what governments -which, through central banks, are holding interest rates at record lows - are offering.


"What we're seeing right now is a lot of high yield bonds," said Santiago Maggi a managing partner and portfolio manager for Latmark Asset Management, LLC, "but those are corporate bonds, and not big companies or companies that are well known. They are taking advantage of people looking desperately for yields," he added.


Where the opportunities from private sector issuances will present themselves will depend on which countries the issuers mainly operate.


In Mexico, "'I think there would be more opportunities in the corporate market than the government," said Santiago Ulloa, managing partner for We Family Offices, investment advisers catering to ultra-high-net-worth Latin Americans. "The sovereign debt has rallied a lot but we see opportunities with companies that, instead of going to banks and asking for loans, are going to the bond market for issues."


Across the region Ulloa said investing opportunities lay with the growing middle class. "They're buying goods and services and we want to be playing that for the next 10 years," he added.

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