CAF: leading shareholder in Latin American fund for infrastructure projects

(Caracas, March 4, 1999).- CAF today approved participation as principal shareholder in the Darby Latin America Mezzanine Debt Fund for Infrastructure Projects in Latin America, an innovative financing instrument designed to attract private capital into the region.

The objective of the fund – which will specialize in the areas of energy, transport, water and sanitation, telecommunications and mining – is to create a portfolio of diversified investments, based on granting mezzanine finance (subordinated debt) for infrastructure projects in the region, whose returns will be very attractive to investors by means of loan-to-equity conversion options or through participation in the income from the projects.

CAF President & CEO Enrique García said the institution would participate in the share capital of the fund with an investment of US$25 million. He said the operation was part of the Corporation's strategy of attracting private foreign investments into the region to finance physical infrastructure projects, in line with the interest of governments in providing adequate infrastructure in order to enhance their competitive presence on world markets.

He added that CAF participates in several funds which finance projects of this type: the Scudder Fund for Private Electric Energy in Latin America and the Caribbean, and the Infrastructure Fund for Latin America.

The Corporation, as the main shareholder of the Darby Fund, will play a leading role in introducing this new financing instrument, which has already been successfully used in the United States and emerging markets and which is very necessary in the current macroeconomic situation in the region.

The Fund will open new business opportunities for the Andean countries and the rest of Latin America, and CAF – as leading multilateral bank – will have the first option for participating in the financing.

Investing with less risk Mezzanine financing is a less risky alternative to investment in capital and gives a higher return than senior debt. There is currently a very wide gap between the cost of senior debt and the cost of capital invested, which has opened the possibility of steering investments into subordinated debt, whose cost is intermediate between the other two.

For this reason, the Fund plans to invest in projects which aim to close this gap, obtaining returns which are lower than those expected on capital investment but with less risk.

The Fund will be managed by Darby Overseas Investments Ltd (Darby), investment firm specializing in emerging markets, set up in 1994 by former US Treasury Secretary Nicholas Brady.

The objective of the fund is to achieve a capital of US$500 million, of which 50% will be capital and the rest debt. Most of the capital will be contributed by a group of four investors: CAF, as multilateral bank; Dresdner Kleinwort Benson as investment bank; Banco Bilbao Vizcaya as commercial bank; and Darby Fund as manager. Another group of investors – formed by insurance companies, banks, fund managers and pension funds – will contribute the remaining capital.

With respect to the debt, the Inter-American Development Bank (IDB) has approved a US$75 million loan for the Fund and KFW is considering finance of up to US$50 million under conditions similar to the IDB loan.