Publish in Perspectives - Wednesday, December 9, 2015
Fibra E should significantly benefit Mexico’s investment climate and economy, though these favorable effects may not be felt overnight, experts say. (Photo: Cofemer)
Fibra E will spur investments in Mexico’s energy sector, experts predict.
BY ENERGY ADVISOR
On Oct. 1, Mexico launched a new investment structure, known as Fibra E, which, similar to a U.S. master limited partnership (MLP), provides tax incentives for investing in the energy or infrastructure sectors through that specific investment vehicle. This comes at a time when investment and production in the oil sector seems to be sputtering. Will Fibra E spur investment and growth in Mexico’s energy sector? Should Mexico use this structure to target specifi c investors? Are there any potential drawbacks to participating in a Fibra E investment structure? How will the new structure affect Mexico’s investment climate and economy more broadly?
Arturo Carrillo and Joy K. Gallup, partners in the Latin America and Corporate practice, at Paul Hastings LLP: Fibra E will help spur investment in Mexico’s energy sector; the product is designed largely to achieve the same incentives in energy investment that MLPs achieve in the United States. It is likely safe to assume that the sophisticated investor base interested in the Mexican energy and infrastructure sectors for the most part understands that a long-term commitment is necessary. There are two primary classes of investors likely to take a keen interest in this product. The first is Mexican pension fund (Afores) investors who are looking for long-term interest-bearing products. The second is the international, primarily from the United States, investors who are highly familiar with the U.S. MLP investment vehicle. However, to the surprise of many, the tax structure associated with this new investment vehicle does not appear to be entirely complete as of yet. Of key concern to the sponsors of these investments is that there is an immediate 30 percent capital gains tax on the contribution of the assets to a Fibra E. By comparison, the Fibra real estate product already in place in Mexico has a significant deferral feature for assets contributed to a real estate Fibra. This deferral of course makes the vehicle very attractive to potential sponsors. We understand from valued senior sources that serious discussions are taking place among Mexican tax offi cials to rectify this treatment and provide the same type of deferral feature for assets contributed to a Fibra E. Making this change to the current Fibra E tax structure would undoubtedly make this product significantly more attractive to sponsors with assets that have capital gains built in. Ultimately, Fibra E should significantly benefit Mexico’s investment climate and economy, though these favorable effects may not be felt overnight.
Jorge Mesta, lead tax partner for real estate and infrastructure at Deloitte: Fibra E can provide a significant boost to investment figures if the two main owners of existing energy assets (Pemex and Comisión Federal de Electricidad) are able to float some of their assets in the near future and use the proceeds obtained to finance new investments. For Pemex and CFE, those proceeds would arrive at the right time, given the decrease in oil prices and the restriction in public expenditure. However, Pemex and CFE are undergoing a full-reorganization as a consequence of the energy reform. Thus, floating assets into a Fibra E is just one of the points in their reorganization agenda. For a private sponsor, a major issue to overcome is the exit cost created by the transmission of assets into the Fibra E, as taxes will have to be paid on that gain made for such transmission. From a securities standpoint, the taxation regime of the instrument as a security is acceptable, but the exit tax for the sponsor of the project will be major disincentive for many market participants. Other issues relate to the need to have a more permanent legal framework (e.g. a law passed by Congress rather than rulings issued by executive powers), better corporate-governance and financial information reporting, among others. Such issues need to be solved for Fibra E to have a significant impact on Mexican financial markets. They may not be a complete deterrent, but they do limit the number of participants and projects that can be attractive enough for incorporation into a Fibra E. It is important to note that in order to attract significant levels of investment, Fibra Es will have to compete with similar vehicles that attracted international investors, such as MLP investors.
Luis Miguel Labardini, partner at Marcos y Associados Infraestructura y Energía: The Fibra E is an initiative that will allow investors to participate in projects that have mature cash flows. The typical investment of the Fibra E is a long-term take or pay contract signed by Pemex, in which Pemex is committed to paying a daily or a monthly rate for the capacity of a certain E&P asset in shallow waters. Another example would be a pipeline for which the CFE has signed a long-term agreement committing to use a certain percentage of the existing capacity. This scheme will allow investors to enter the energy sector in projects that have stabilized cash flows and will free equity capital for Pemex or CFE to embark on other equally strategic projects. In this sense, I see the Fibra E as a means for Mexican public entities to obtain fresh capital to make critical investments, taking into consideration that the Mexican government will not provide fresh capital to these entities, and there will not be an IPO of these companies any time soon. In the long term, I believe that both Pemex and CFE must sell stock in the international financial markets in order to solve the increasing financial problems associated with the need to finance their capital requirements through the issuance of debt. The Fibra E must be followed by other similar limited partnerships to make this type of instrument a viable source of much-needed financing in the energy sector, not only for projects that have ongoing mature cash fl ows, but also for greenfield pipelines, as well as oil and gas exploitation facilities.
Eduardo Canales, global energy transactions associate at Akin, Gump, Strauss, Hauer & Feld LLP: Two main factors have arisen as important challenges to carrying out the industrial transformation that the Mexican government had envisioned when enacting the 2013 energy reform: first, a lower-than-expected demand from global consumers like China and United States, paired with the global oversupply of hydrocarbons, have prompted a steep decline in commodities prices. Second, critical underinvestment in Mexico’s hydrocarbon exploration, production, transportation and treatment assets has produced a severe lag in the energy supply chain. Despite significant efforts, Pemex and CFE (Mexico’s state-owned fully integrated energy and power entities) have been unable to meet the increasing energy demanded from the manufacturing and construction sectors. However, Mexico’s development goals remain as ambitious as ever. Government authorities have been working with the Mexican stock exchange and the private sector to develop an investment vehicle that may tap into new investment sources to fuel the development of the energy industry. The Certificados de Inversion en Energia (Fibra E) are a hybrid investment vehicle that incorporates characteristics commonly found in master limited partnerships (MLPs) and real estate investment trusts (REITs) in the United States. This new investment vehicle will allure investors who have never been able to access the Mexican energy market. The main drawbacks of the Fibra E come from its origin. Since this investment vehicle is an adaptation of the Mexican REIT, some of the operational and corporate governance flexibility seen in American MLPs will be lost in translation. Overall, the Mexican government has done an impressive job in designing and enacting laws and regulations that will promote the development of its energy industry. Mexico has created a solid fundamental legal framework that shall impel the sustainable development of its energy industry.