Until recently, Peruvian banks were discouraged from considering the sub-sovereign market. This was due to a lengthy and complex sub-national borrowing approval process, the limited technical and financial capacity of sub-nationals outside of Lima, the difficulty predicting and intercepting intergovernmental transfers, and the uncertainty about whether mayors and regional presidents would honor the debt obligations contracted by their predecessors.
This changed in 2008, when SNTA funded technical assistance to facilitate Peruvian sub-national governments’ access to financing from commercial banks and capital markets. The goal was to complement existing government transfers and revenues, diversify funding sources, lengthen the maturity of available commercial bank financing, create and strengthen credit histories, and introduce financial discipline. Success included the following results:
- The Metropolitan Municipality of Lima signed a $70 million commercial bank loan with a local commercial bank in April 2010—the largest market-based borrowing ever concluded by a sub-national government entity in Peru. The loan was backed by a $32 million IFC partial credit guarantee. Technical assistance was instrumental for the overall engagement with Lima officials and transaction support. In particular, SNTA supported the consolidation of the accounts of the Municipality of Lima and the 19 public companies and other entities it controls; the credit rating from an international credit rating agency; and the development of a five-year macroeconomic corporate report for Lima with projections up to 2015.
- The Regional Government of Arequipa signed a $10 million loan with a local commercial bank to finance its regional road rehabilitation program. This marks the first time that a regional government in Peru has borrowed without a sovereign guarantee. As with Lima, the loan was backed by an IFC guarantee.
Other Peruvian local governments and public utilities supported by SNTA are also improving their creditworthiness. At least one additional commercial financing is expected to close in 2012.
Lima, driven by its need to achieve higher levels of leverage and by its desire to benchmark its debt management capacity in light of the subnational debt’s rapid growth, is reviewing its debt management and planning functions. Corporate-level financing options may be feasible for Lima along the more traditional project-level financing. SNTA support has delivered a rapid market assessment to provide a glimpse of market appetite for long term corporate borrowing by domestic institutional investors, as well as to help inform the views of underwriters, rating agencies, and fiduciary banks.