AMLO Saddles Mexico With a $5 Billion Loss

(Bloomberg) -- In the euphoria over the deal Mexican President Andres Manuel Lopez Obrador struck this week with bondholders in an aborted airport project, one key fact garnered little attention: The move will only further swell the losses that the cancellation is heaping on the government.

By one conservative estimate, the number -- once you factor in the amount already spent on the project, plus contractors’ cancellation fees, plus the cost to raze what’s been built -- comes to almost $5 billion. Even in a country as large as Mexico, where the annual budget is about $300 billion, it’s a big cost to absorb for a brand-new administration that’s trying desperately to free up funds to spend on its top priorities: pensions for seniors and youth-employment programs.

“They’re going to be paying the bondholders for a long time, and then they have to undo what they already have done, and that’s not going to be cheap,” said Luis Maizel, senior managing director at LM Capital Group. Maizel, who came up with the $5 billion calculation, recently sold his airport bonds.

To the sunk costs, the new administration will have to add the $1.8 billion of notes it agreed to buy back from investors, money that will come from the airport trust created to build a futuristic hub designed by architect Norman Foster. While the deal was a major victory for the administration as it wards off a potentially nasty battle with bondholders, the buyback deal it agreed to -- par plus accrued and unpaid interest -- was much costlier than it had initially envisioned.

‘Political Win’

Edgar Cruz, a credit analyst at BBVA Bancomer, said the cost of canceling the airport would be as much as $10 billion -- double Maizel’s estimate.

“This is a political win” for Lopez Obrador, Cruz said. “But the people of Mexico are the losers.”

Lopez Obrador also picked up a short-term boost from financial markets, as his deal with bondholders sparked a rally in the debt. The peso rallied and the stock market rose on a day when most global markets sold off.

The new president, a leftist who has railed against corruption and crony capitalism, has argued that scrapping the airport project will actually save Mexicans about $5 billion in the long term. The project in the Mexico City suburb of Texcoco was bloated by graft and sinking on an old lake bed, and the airport would have required billions in yearly maintenance, he has said, without providing a breakdown of his expected cost savings.

Passenger Cost

Financing for the now-canceled $13 billion airport came from $6 billion of bonds sold under Lopez Obrador’s predecessor, Enrique Pena Nieto, which the new administration will use for the bond buyback. There’s also a $1 billion credit line and $1.6 billion in Fibra E securities, which are a cross between a master-limited partnership and a real estate investment trust. The complicated financial arrangement isn’t a coincidence -- it was designed by the Pena Nieto administration in a bid to make the whole thing hard to undo.

Airline passengers will also pay for years for an airport they’ll never see as they fly out of Mexico City’s congested existing hub and soar over the X-shaped structure that was set to replace it in nearby Texcoco, east of the capital. The bonds gave lenders exclusive claim on airport user fees that are baked into ticket prices, and which would typically be used to pay for airport upgrades.

The charges will be set at $45 a passenger for international flights and $24 for domestic next year -- among the most expensive in the region, according to the International Air Transport Association. About 44.7 million travelers paid one or the other last year. There’s also the cost of losing passengers to hubs in Dallas and Panama that IATA warns will result from the Mexico City cancellation, according to El Economista newspaper.

Airport Alternative

As an alternative, Lopez Obrador is pushing a plan to build two runways at a military base while upgrading the existing airport and a smaller hub in Toluca, west of Mexico City. But that plan has been deemed non-viable by the aviation research arm of Mitre Corp. because of air-safety concerns.

It’s also still unclear how the president would pay for his plan. Deputy Finance Minister Arturo Herrera said Wednesday that an initial 15 billion pesos ($745 million) will go to the Defense Ministry to start construction work at the base.

There’s no estimate yet on what the total cost will be. But BBVA Bancomer’s Cruz reckons that scrapping the old project and building the new one will carry a price tag of about $13 billion -- the same amount as the airport Lopez Obrador just axed.

©2018 Bloomberg L.P.