Risks and rewards
One of the few Latin America acquisition financings to see the light of day over the last year, Minera Frisco’s US$1.1bn five-year loan stood out not only for its size in a market dominated by smaller trades and refinancings, but for the challenge of selling debt from a start-up with high leverage.
As a spin-off from Mexican billionaire Carlos Slim’s conglomerate Grupo Carso, Minera Frisco was bound to attract attention in a market where banks covet assets. The strength of the controlling shareholder was a plus, but execution was far from simple.
“It is a junior mining company that is not always easy, they had a lot of projects coming on line and banks are not used to taking that risk,” said Gonzalo Isaacs, head of Latin American loans at Bank of America Merrill Lynch, which acted as sole lead arranger and bookrunner.
In-depth discussions with the company were required to get banks comfortable with a high leverage ratio, despite talk of an attractive initial margin of 300bp plus over Libor. The US$750m purchase of Mexican assets from Canada’s AuRico Gold, which the loan was funding, also had ratings agencies fretting about operational and execution challenges as the company started its modernisation projects.
Against that backdrop, loan pricing levels were very difficult to set. Banks typically willing to accept such risks in return for higher margins were disinclined to participate because the loan was tied to a leverage grid, so it had the potential to drop to around 150bp once projects became fully operational.
In addition, more risk-averse institutions were hesitant to extend credit to a company with a leverage ratio of close to five times, and with no independent audit for Minera Frisco’s resources several large and liquid Japanese institutions decided to give the transaction a wide berth.
Leveraging Minera Frisco’s strengths and its sponsorship from Slim, who saw the spin-off as a pet project, BofA Merrill nevertheless was still able to entice a total of 10 banks into the deal.
It did this partly by having the four senior MLAs – Barclays, JP Morgan, HSBC and Scotiabank – to take an active role in the syndication process. This not only gave them a share in the economics, but also allowed them to have face time with a borrower that potentially had more ancillary business down the road.
By the time of signing in December 2012, banks completed a two-stage syndication process with commitments ranging from US$50m to US$212.5m in a deal that was 1.4 times oversubscribed and came with an out-of-the-box margin of 325bp over Libor.
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