Didier Mena, Director General, Navix, Mexico
“we go beyond providing capital by getting involved and supervising the projects we finance. Navix has its own petroleum and civil engineers, among others, continuously ensuring the smooth progress of any given project we participate in.”
Could you please begin by introducing Navix to our international readers?
Axis Capital Management, the controlling shareholder in Navix, is a Mexican private investment firm founded in 1990. Having been an active player in structured finance to a variety of sectors, Axis recognized that there was an unsatisfied demand for lending services to domestic small and medium businesses in the energy sector. As a result, Axis launched Navix in 2007 as a non-bank financial intermediary, with the objective of creating a solid, well capitalized, institutional platform to consolidate its structured financing activities associated with the Mexican oil services industry.
Prior to Navix’s incorporation, funds were typically raised by issuing a specific variant of medium term notes to international investors. Nowadays, Navix’s primary sources of funding are the Mexican pension funds through “Structured Equity Securities”, or CKDs (formally, Certificados de Capital de Desarrollo). In 2010, we placed some 4 billion pesos (US $322 million) in equity-linked structured notes on the Mexican Stock Exchange. At that time, the event marked one of the largest placements of the new instrument in Mexico.
Since its establishment, Navix has lent out close to Ps 10 billion (approximately US $700 million) through CKDs. More specifically, our relevance and added value is clearly demonstrated by the fact that Navix typically provides 90 percent of its individual clients funding needs. Simultaneously, this figure also illustrates the financing shortages in the domestic energy sector.
Navix was born in the middle of one of the worst financial crises in history and, despite the difficult environment, you are still here! How so?
Indeed, having been established in the midst of one of the worst financial crises did pose its challenges. However, Navix was able to grow during that time in large part due to the firms’ strong shareholder base. Along with Axis, Eton Park, Stark Investments and Citi Group were among Navix’s other principal investors. Together, these institutional investors granted the firm with access to other pockets of capital that complemented Axis’s traditional funding channels, allowing us to capitalize on specific opportunities as they materialized.
To what would you attribute the firms positioning as the leading player in non-bank loans to the energy sector? What sets Navix apart?
Flexibility is one key advantage of Navix.
Most of our clients have contracts with Pemex. Typically, payments are barely made in time as projects are subject to weather conditions, or the required services are intermittently altered, or even launch dates are extended, for instance. This is perfectly natural in the oil industry and we understand that very well. By contrast, this inherent volatility in the sector is an issue for traditional Mexican banks due to restrictive banking regulations they must adhere to.
In addition to its flexibility, Navix is strengthened by its ability to quickly respond to changing market dynamics and needs. Whereas typical banks might hold credit committees twice a month, for instance, we can have these multiple times a week if need be.
A final, but critical, aspect in the way Navix does business is the fact that we go beyond providing capital by getting involved and supervising the projects we finance. Navix has its own petroleum and civil engineers, among others, continuously ensuring the smooth progress of any given project we participate in. We also have specialists dedicated to providing advisory services to our clients on how to best collect its receivables from Pemex. That might seem rather straight forward, but Pemex has a unique way of doing business that require a lot of familiarity in order to get fully paid and on a timely manner.
Following almost 8 decades of state-control, the energy reforms are one of the most exciting industry developments to sweep the industry. How will the reforms change the way Navix has done business?
First and foremost, the biggest change is that Pemex will no longer be the only issuer of contracts; it will be stripped of its monopoly position. Although that in itself has a variety of implications, the investment opportunities resulting from that are tremendous. While expected investment flows vary widely, our conservative estimates indicate that yearly industry spending will increase by at least 30 to 40 percent over the medium term. In the trickle-down effect, these investments will in turn generate greater demand for oil services.
As a result, Navix is transforming itself in response to these developments. So far, we have excelled in providing financing up to US $55 million; a constraint we face given the way we fund ourselves. However, some of the companies we have supported have now grown into significant players that require financing that exceeds that lending limit. Similarly, US $55 million might not be enough for some of our prospective clients. Because we want to continue supporting the growth of these promising companies, we are looking at providing syndicated loan services with both local and international investors. We are very excited about these developments because investors have demonstrated a strong appetite for such opportunities, so long as Navix is involved.
Why is it that these prospective investors have made Navix’s participation contingent to their participation?
With a solid track record, Navix has proven its ability to originate loans in prudent manner that seeks to minimize risk. One indication of our ability to pursue the most attractive opportunities lies in the fact that a vast majority of the projects we have financed have been completed with no incidents. In addition to this, investors also value our deep understanding of the industry and how we supervise the projects we finance.
Oceanografia, for instance, the Mexican offshore services provider that has headlined international news with allegations of significant financial fraud, has previously approached us. It is our meticulous approach to due diligence and deep industry knowledge that advised us against moving ahead with that. Needless to say, this was an excellent decision in hindsight.
With the transformations sweeping both the energy and financing sectors in Mexico, how would you like to position Navix?
We want to be a boutique investment bank. If that means providing our clients with lending facilities in excess of US $55 million, we want to be involved in that. If they wish to raise other forms of capital, we also want to be involved in that too. Navix and Axis are the single largest independent managers of pension funds in Mexico, with a combined Ps10 billion under management. We want to replicate the sort of success we achieved with Oro Negro – in which the pension funds, through Axis, are the single largest investors with a 46.5 percent holding.
Looking back into Mexico’s history, the primary motivation behind President Lázaro Cárdenas’ nationalization of the industry was the willingness to redistribute the wealth derived from the country’s natural resources. In my opinion, there is no better way in which Mexicans can benefit from the industry’s growth than by making them shareholders of the companies active in the sector. That is what Oro Negro is all about. If Oro Negro were to list in the public markets, the primary beneficiaries of that increased value will be the Mexican pension holders.
One also has to bear in mind that pension funds in Mexico is still a relatively new industry created in 1997. Still, 50 percent of their assets under management are government securities, whereas only 4 percent are invested in CKD instruments. Not only does this leave much room for growth opportunities for the pension funds, it also represents a significant source of financing for our industry. Although the investment opportunities might not always satisfy the pension funds’ risk appetite, we will always look to source capital from the them first before turning to other domestic or international investors.
Finally, we also want to branch out our services portfolio to include strategic advisory services to our clients as part of the final stage of our strategic plan. We are keen to leverage our experience and industry knowledge to provide advisory services to companies looking to consolidate their operations, or bring in a strategic partner, for instance.
The common theme we get from everyone we speak to about the reforms is the diverse range of opportunities it creates across the entire value chain. What sort of opportunities or market niches will you be looking to capitalize on?
There are indeed a wealth of opportunities out there, many of which would be suitable for us, as a group, to get involved in.
The way that the pension funds became shareholders in Oro Negro was a result of their involvement with Navix. When Oro Negro was incorporated, the pension funds that participated in the Navix CKD reached out to the Axis Group and expressed their interest in not only being involved on the debt side, but also in equity. They wanted to become shareholders of the company and so Axis issued a US $500 million in another CKD. Of that, US $300 million is already invested, leaving the remaining US $200 million as available capacity for investment. These can be invested in pretty much any project that meets our criteria. This can either be invested in Oro Negro should the need arise, or it can be directed at other opportunities that Axis Group is always on the lookout for. Because we like to assess various opportunities as they arise, we will not limit ourselves to any specific niche or segments in the energy sector.
How well prepared is the financial sector in Mexico to cater to the overall boom in investment requirements of the oil and gas industry?
Unfortunately, the financial sector is far from ready for that. The banking sector has thus far expressed a general lack of dedication and focus to the energy sector.
Owing, in part, to the involvement of the pension funds in energy, the finance sector has certainly grown in depth. However, although Mexican banks are rather liquid and robust in terms of their capital ratios, they are also rather risk averse and reluctant to enter the energy sector. As a result of the 1994/5 banking crisis in Mexico, most of the sector was taken over by international banks and the government did its part by issuing government securities to ‘clean’ their balance sheets. Today, the balance sheets of the banking system are heavily weighted with investment in securities, representing close to 30 percent of the banks’ balance sheets. Instead of branching out into unfamiliar territories, local banks understandably chose to pursue their more traditional lines of business; providing mortgages, credit card loans, personal lines of credit, and so on. The local banking sector has therefore never developed the expertise unique to the financing of energy projects, leading to a significant gap in the market.
Admittedly, the Oceanografia fraud debacle will dampen the banking sectors enthusiasm about the local energy sector, but there is no point in avoiding the sea of opportunities out there. Nevertheless, with time, as international investors start flooding the market, the banking sector will be hard pressed to resist participating in the sectors growth.
Given your indirect role in generating wealth for Mexican pension holders, what are your ambitions for Navix as the energy industry heads towards a new chapter in its history?
We intend to position Navix as the go-to facilitator of the energy sectors strategic and financing needs. We take those responsibilities very seriously, as we do our responsibility of managing the funds of the Mexican workers.
Given our industry experience so far, we have accumulated a firm understanding of the energy sector dynamics and its key players, we understand the specific needs of the different projects, and are well aware of the investors who have expressed an eagerness to gain exposure to the sector. We are dedicated towards combining that knowledge and making it work to our clients’ best interests.
Going beyond being a relevant industry player, we are also keen to achieve a scale that would justify Navix’s listing on the public markets. Not that this is a goal in itself, but floating Navix would allow us to reach the scale and returns that would enhance the overall groups flexibility.
In whatever way you look at it, the financial sector in Mexico is significantly under-penetrated. In parallel, the domestic energy sector is set for a significant overhaul that is expected to unlock a myriad of promising growth opportunities for all players. For that reason, as an energy focused financing firm, we feel very fortunate to be at this critical juncture in both sectors’ transformation. Indeed, current market trends indicate that the winds are in our favor and we are eager to being writing this new chapter in the history of Navix and the energy sector.