Sailing with the trade winds

Published: 23 March 2009

Peru sets itself to profit from port position

The Port of Callao sits in the middle of South America’s Pacific west coast, connecting Peru and the rest of South America to the rest of the world.

Callao, 15 kms north of Lima, is Peru’s major port and handles 80 per cent of Peru's trade traffic. It once was Spain’s most important port for the shipment of gold and silver from the Inca Empire and goods from Peru, Bolivia, and Argentina. Now it is seeing a resurgence of interest and holds great promise.

Peru’s economic story is interesting. The country has seen GDP grow over eight per cent in the past couple of years. Peru’s trade figures have improved as well. The country has posted six successive years of positive trade balance. (See 'Economic indicators' table below.)

Increasing demand for mining products (zinc, gold, copper, silver and lead) has come from the USA, Canada and Switzerland as well as from emerging countries such as China and Chile. The country has also recently signed trade pacts with the USA and China.

Source: It's Not Easy to Ease, Latin America Insight, HSBC Global Research Macroeconomics Q1 2009

With the economy growing, trade improving and trade relations expanding, it has become imperative to develop Peru’s transportation infrastructure. Since the 1990s, the government has been privatising infrastructure in an effort to support the increased economic growth and reduce the cost of trade. The country has seen a spate of infrastructure projects changing from concessions to privately operated projects. The Jorge Chavez International Airport in Lima was privatised 10 years ago and recently regional airports have been as well. Private investors are managing highways. Development of a railroad line connecting Brazil to the coast of Peru was recently declared of public interest by the Brazilian and Peruvian Congresses. The movement of goods in and out of the country has become a linchpin to economic development.

Callao is Peru’s busiest port, handling 1 million TEU per year and has a compound annual growth rate of 14 per cent.

In June 2006, the Republic of Peru through the National Port Authority on behalf of the Ministry of Transportation and Communication awarded DP World Callao SA (DPWC), a wholly owned subsidiary of DP World Limited (DPW), a 30-year concession for the design, construction, financing, conservation and operation of the new container terminal in Callao.

HSBC acted as sole financial adviser, lender, documentation agent and administrative agent to DPWC on its USD300 million financing of the Phase 1 Greenfield project in the southern zone (Muelle Sur ) of the Port of Callao. The debt financing was structured on a club basis using DPW’s corporate guarantee. The transaction was closed in October 2008. HSBC advised DPWC on the financing structure, was able to assemble a group of eight banks and closed the deal even amid volatile and challenging market conditions.

According to Ismael Echegaray, Manager, Global Banking, HSBC became involved in the Muelle Sur terminal project in the Port of Callao in early 2006 when the Bank advised one of DPWC’s competitors but did not win the bid at that time.

When DPWC was awarded the concession, HSBC was able to pitch for the financial advisory for Phase 1 of the project with the help of Private Banking in Geneva and Project and Export Financing (PEF) in New York.

“We were able to bring a team from PEF in New York including the head of PEF for the Americas,” Mr Echegaray said. “HSBC Peru was able to establish HSBC’s capabilities in PEF advisory and that was among the reasons why we won the deal.”

Several factors facilitated the ease with which the deal was closed, he said. First, the team HSBC put together was joined up, seasoned and had a lot of expertise in handling these types of deals.

Second, the speed with which the deal was put together, executed and closed was extremely important given the rapidly evolving market conditions. Since the market condition at that time was quickly turning into a major crisis phase, execution had to be swift. The team quickly pointed out the best structure that would be bankable and settled on a club deal with a corporate guarantee attached to it. Any other way would have pushed back the date of completion and would have been detrimental for the transaction. DPWC also had to secure financing by a certain date for it to gain access to guarantee packets from the Peruvian government.

Third, Peru’s regulatory framework made it easy for foreign investors to come in. Since the 1990s, Peru has done a good job of not changing the rules of engagement for foreign investors despite the changing political orientation of the government (rightist to centrist to left-leaning).

Last, even though Callao is the most important port on the west coast of South America, it lacked basic infrastructure. It is the only port of this size that does not have gantry cranes and modern management systems. However, the trade-flow projections are attractive enough.

Luiz Felipe Mauger, CEO of HSBC Bank Peru S.A., said this was a landmark deal for HSBC Peru since it was able to prove its capability of handling cross-border deals, execute transactions in extreme market conditions under a tight timeframe and it confirmed HSBC’s leadership in infrastructure financing in Latin America.

“Peru as a country and the Port of Callao is very well located geographically. Callao is the port in the region that can benefit most from trade between Asia and the Americas through the Pacific Ocean. With the country growing economically, having a port with world-class facilities and infrastructure equipped to handle the projected increase in the traffic of goods in that area increases the chance of the port becoming a regional hub,” Mr Mauger said.

"Since Peru relies on the growth of its trade to drive development, it is of national importance that a port with state-of-the-art and world-class handling be developed to help reduce the cost of trading and increase efficiency,” he said. “It is essential that the right operator and investor be in place to help develop Callao into a regional trading hub capable of competing with other ports around the world.”