The energy sector in Argentina: tapping into credit market opportunities

Interview with Marc Ricart from EVERGY Credit Partners.

EVERGY Credit Partners is a dedicated, independent private credit asset manager with an unparalleled understanding of the Latin American and Argentine Energy Sectors.

 

 

Argentina is a compelling investment story, it is the 3rd largest economy and has the 2nd highest GDP per capita in Latin America.

Having undergone 6 years of restrictive government policies, with Macri’s government now in power for almost 2 years, the country has shifted 180 degrees and has become a very attractive investment prospect.

The government, whose initial batch of reforms were recently validated after excellent recent mid-term legislative election results, has successfully focused on three main pillars of development: 1) reducing the deficit, 2) reducing inflation and 3) spurring investment – all aimed at achieving sustained growth. The fruits of these policies have started to show with year on year growth of close to 5% registered in September and yearly growth rate estimated at 3% for 2017 and 3.5% for 2018.

The country has proven to be attractive to international investors where in the international debt capital markets Argentina has recently issued upwards of US$ 40bn with numerous over-subscribed bond offerings at the sovereign and sub-sovereign levels at tenors as long as 100 years. In addition, we have seen yields compress across all tenors and in the 5 year bonds, for instance, these have compressed from 700 to 450 basis points since their initial issuance. Argentina has also attracted long-term hard investments, especially in the energy sector, with public bidding processes in the thermal and renewable energy sectors that have been generously over-subscribed (5-9 times).

We expect the government policies to continue to favour an open market oriented investment climate and judging from the latest elections we expect governing continuity for at least 6 more years and possibly 10.

 

The Argentina Energy Credit Fund

We have decided to launch a fund with these characteristics because we believe that the market dynamics found in Argentina favour a private credit investment platform, and allows our investors to achieve higher returns per unit of risk, when compared to investments in other emerging market economies.

The fund will be long development via its long position in the Energy Sector and, as has been the case with other emerging economies, we strongly believe we will be aiming at sector that will grow at a multiple of GPD growth. Energy is also a strategic sector for the current government as the country inconceivably became a net energy importer whilst it sits on the 2nd largest recoverable shale gas and 4th largest shale oil reserves in the world as well as having an immense renewable energy potential with over 70% of its territory having feasible wind speeds and some regions having solar radiation at the same level as those found in the Chile’s Atacama Desert.

If we couple this last point with the fact that most top middle market players in Argentina still do not have access to cross-border capital or bank debt markets, we believe we have a very compelling investment proposition. We believe the pipeline is large enough for us to be able to pick and choose the best borrowers and those which can provide the strongest security packages. We estimate debt investment needs in the next three years from announced investments or investments required just comply with existing regulations to be around US$ 40bn. Of these, we believe our target market is US$ 12bn and if we capture 5-10% of this market we are talking about immediate investment opportunities of US$ 600m – 1.2bn.

Therefore, in addition to the compelling benefits of private credit investments, which we believe to be very relevant investment factors in Argentina, such as downside protection, self-liquidating investments and unique return profiles with high cash yields and frequent payments, Argentina offers a captivating opportunity around lending to an un-competed middle market in the energy sector.

 

A unique proposal

Evergy is a joint venture of three parties that bring a unique set of skills and capabilities for investors: deep country knowledge, deep sector understanding, experience lending in the middle market within the energy and infrastructure sectors, strong technical skills and existing asset management capabilities, all under a team with international experience that will operate from the region.

The Pegasus Group has over 15 years of experience investing in companies in Argentina and manages upwards of US$ 500m of institutional capital; Endriven owns six energy companies, one of which is the largest private mid-stream player, companies which they have developed, constructed and currently operate themselves, and finally myself,  having led private credit investments for close to US$1Bn in the energy and infrastructure sectors in Latin America including investing close to US$ 100m in Argentina.

In summary, Evergy is a unique credit fund manager, with a clear strategy, executed by a proven and local team, set up with the in-house expertise to call upon an operator of the local energy market for activities related to the market opportunities, technical due diligence and, if required, work-out solutions of investment transactions. This last point being a strong differentiating feature, which under a work-out scenario provides investors with an ability to minimize loss by taking an operating role of the asset, even making money from it.

Evergy has the institutional footprint of its partners, providing investors with the highest level of diligence, ethical standards, transparency and openness as key values for investor relationships.

 

Evergy

 

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