Mexico City Airport Threatens to Turn Into Investor Standoff

(Bloomberg) -- A referendum on the future of Mexico City’s partially built airport this week is shaping up to be president-elect Andres Manuel Lopez Obrador’s first standoff with investors who have taken a wait-and-see approach to the new government.

The nationwide vote from Oct. 25 to Oct. 28 will ask people whether they want to push ahead with the $13 billion Texcoco project, or go for a cheaper alternative further away from Mexico City. According to a national poll by El Financiero last month, 63 percent of respondents support the continuation of the airport construction.

As the referendum approaches though, investors are getting increasingly nervous. The yield on $6 billion of bonds sold to finance the new airport has soared to a record this month after AMLO, as the president-elect is known, said in a Facebook video that “we can’t finance this project” and one of his advisers warned it was two years behind schedule. It could become a litmus test of the new government’s approach to business and financial affairs.

"There have been growing risks that the consultation results in a negative outcome" for the Texcoco project, Bank of America analysts wrote in a note Monday. If that happens “investors will revise upwards the probability that AMLO enacts less market-friendly policies than what his economic team has put in front of investors.”

Mexico City Airport Threatens to Turn Into Investor Standoff

While this week’s so-called public consultation is not legally binding, Lopez Obrador is pledging to respect the outcome, which should be announced Sunday. The exercise will be unprecedented in Mexico given that it includes the referendum in more than 500 towns and a face-to-face survey.

The market jitters have even reached the peso, which has weakened 3.4 percent in the past five trading sessions, the worst performance among emerging markets.

High Cost

“There has been mixed signaling over Lopez Obrador’s preferred choice but comments over the past week are making us more skeptical that he will decide to continue the construction,” Eurasia said in a research note last week.

The airport’s cancellation would come at a high cost. The project is already 32 percent completed, according to the last estimate by Enrique Pena Nieto’s administration in September, and much of the money for its completion has been raised.

As well as the bonds, another $1.6 billion was raised through an initial public offering of Fibra E shares -- a hybrid between a master-limited partnership and a REIT. Fibra E’s are a relatively new model in Mexico and winding down one is an uncertain process with no precedent.

If required to prepay the current debt related to the project -- bonds, a bank credit and a 30 percent cancellation fee -- the government would have to pay $10.48 billion, or 0.88 percent of gross domestic product, BBVA wrote in a note Monday.

Ratings Pressure

"The reputational damage of canceling the project might bring pressure to Mexico’s rating, and consequently, consistently higher yields for the coming administration,” BBVA wrote. “So while the damage to public finance would be relatively small, the decision could prove to be yet another budgetary restriction for AMLO’s government.”

A U.S. non-for-profit organization, MITRE, and a special arm of the United Nations called the International Civil Aviation organization have evaluated the new airport project. MITRE released a statement in December that said the alternative plan is "not viable from an aeronautical perspective in neither the near-term or the long-term,” due to limitations with the airspace and traffic flow from the current airport and Santa Lucia.

The cancellation of the airport project and the construction of the potential Santa Lucia expansion would cost a total of $20.5 billion, according to a study by the Mexican society of civil engineers. The CEO of the airport group managing the current project, Federico Patino, said the organization was concerned about the potential result.

"Of course we’re worried," Patino said. "In light of this choice between Santa Lucia or Texcoco, we believe it would be an error if it was Santa Lucia. Texcoco is a viable project, one that has been studied and can ensure the safety of its passengers.”

The Mexican private sector has taken its stance against the referendum. The CCE Business Chamber issued a statement Sunday criticizing the process and reiterating that construction should continue.

"We consider that there aren’t the necessary conditions for this consultation to be considered an impartial and objective exercise," the Chamber said. "The alternative is clear: to use less resources now and to spend more very soon; or to make a long-term investment for our development."

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