Fitch: Colombia's Banks Challenged in Funding 4G Highway Project

Colombia's massive 4G highway overhaul project creates business opportunities for local banks, but not without funding challenges, says Fitch Ratings. The most significant challenge for 4G is attracting diverse foreign funding. Fitch believes that a funding split of one-quarter international and three-quarters local would limit the potential for outsized commitments by Colombia's banks.

The first two of three phases for 4G requires about USD15 billion in financing. Local banks are expected to fund up to about half of that amount. We see Colombia's banks holding enough capital to withstand a high growth rate of 4G project loans under such a scenario.

Large Colombian banks such as Bancolombia, Banco de Bogota and Davivienda, along with midsize banks such as Corpbanca, Occidente, and new regional players including BTG Pactual, ITAU and Santander could participate in 4G's financings. Each of these banks may require some buildup of internal risk management capabilities relating to project management expertise, as the risks of such loans materially differs from traditional lending such as commercial and corporate loans.

Approximately USD4 billion to USD5 billion of the initial need is expected to be executed through the local capital markets, private debt offerings or other arranged financings. Colombia's outstanding corporate capital market is around USD15 billion, thus we see international funding as important due to potential capacity constraints with local capital markets. Direct investments from the local pension funds will round out sources of funding.

Colombian banks' ability to attract foreign investment will be aided by the recent change to local laws that now permit banks to issue bonds in foreign markets. On the other hand, nervousness about U.S. rate hikes could be influential on international appetites for emerging market paper.

Another variable is the Colombian government's completion of the sale of its stake in the state energy company ISAGEN, the proceeds of which are slated to go to Colombian development bank Financiera de Desarrollo Nacional (FDN). FDN is a designated lead arranger in 4G financings and will use the proceeds to support its 4G lending efforts.

FDN projects that it will boost its own overall lending by five times during 2015-2016. If FDN secures additional sources of third-party funding, the loan portfolio could climb USD750 million in the next two to three years, up from USD56 million today. The company raised USD270 million in equity to prepare for making 4G loans. More capital may be raised from other multilaterals. Fitch expects FDN's capitalization to decline, but remain adequate even in a very high loan growth scenario. Banco Agrario de Colombia, a government-sponsored bank, is expected to work with FDN to supply direct credit.

In order to accommodate the expected high loan growth in anticipation of 4G, Colombia's regulators have amended concentration limits for infrastructure projects, lifting the limit up to 25% of the regulatory capital. In practice, we believe that local banks will hold project exposures to a manageable range of 12% to 15% of total loans to be disbursed over the medium term.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

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