01 - Arbitrage Strategy

Create massive arbitrage opportunity by structuring long-term lease deals with Instituto de Previsión Militar (IPM) and Empresa Portuaria Quetzal (EPQ) for over 800,000m2 of land located inside Aeropuerto San Jose and Puerto Quetzal Seaport.

After extensive opportunity screenings and market analysis, TWC identified a massive arbitrage opportunity that required securing long-term lease contracts for strategically located plots of land in Puerto Quetzal, Guatemala, along with government authorization (construction license) for the development of airport and energy generation infrastructure, industrial parks, commercial zones, and midstream (oil & gas) facilities.

*Key stakeholders included IPM (Instituto de Previsión Militar), EPQ (Empresa Portuaria Quetzal), ZOLIC (Zona Libre de la Industria y el Comercio), SAT (Superintendencia de Administración Tributaria), MEM (Ministerio de Energía y Minas), MICIVI (Ministerio de Comunicaciones, Infraestructura y Vivienda), and DGAC (Dirección General de Aeronáutica Civil).

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Over 800,000m2 to develop into an integrated manufacturing and logistics hub with energy generation and midstream (oil & gas) facilities, exponentially increasing land value locked at a very low cost.

Three (3) strategic plots of land that, individually, had limited attractive for private companies:

Finca San Jose (IPM): 500,000m2 inside of San Jose Airport which, at the time, was limited to military operations.
Finca Santa Rosa (IPM): 200,000m2 directly behind Puerto Quetzal.
Franja Este Puerto Quetzal (EPQ): 100,000m2 undeveloped strip of land inside Puerto Quetzal with shoreline, adjacent to Finca Santa Rosa.

TWC realized that, collectively, these plots of land could create a unified industrial/logistics platform to serve aviation, manufacturing, commerce, energy generation, and oil & gas needs.

Franja Este Puerto Quetzal enabled Finca Santa Rosa to serve as a midstrem facility with pipelines running through Franja Este and a mono-buoy sitting in the sea directly in front of it, taking advantage of the natural depth of the port due to a natural and steep cliff. Additionally, Franja Este provided a direct and private entrance to the port enclosure, further enabling Finca Santa Rosa as an industrial/logistics hub directly connected to the seaport.

Finca San Jose leveraged the intention of the Federal Government to expand the military airport into cargo and civil aviation and positioned itself as an attractive opportunity por the development of aviation, commercial, logistic and industrial (manufacturing) infrastructure.

To transform TWC's vision into a contractual reality, the organization had to overcome some key factors:

IPM maximum lease period of 10 years.
VOR limitations on new infrastructure development (DGAC).
Uncertainty regarding to approval process for a mono-buoy.
Bureaucracy and limitations linked to construction licenses.

TWC took a calculated risk and signed 10-year lease contracts initially, with a 1-year grace period to allow the company to further develop business models and work with the authorities in a collective effort to overcome the limiting factors refraining all parts from executing a successful project.

Fortunately, TWC was able to solve most limitations:

Internal IPM rules/regulations were updated to allow a maximum lease period of 25 years with one renewal option (total 50 years).
DGAC approved project to move VOR to the opposing side of the airport, thus easing restrictions on the amount and size of buildings and warehouses that could be built inside Finca San Jose.
EPQ confirmed that Secretaría de Marina would be responsible for the approval of a mono-buoy and shared full viability studies carried out in prior years, ensuring that TWC could in fact build the proposed midstream infrastructure as planned.
Municipality legal framework was updated to allow for "dynamic" construction licenses; TWC received licensees for all plots of land, for all the different infrastructure types, without limitations to changes in size and location within each plot of land.

Once TWC was able to transform limitations into enablers, contracts signed with IPM and EPQ were replaced with new ones, with lease periods of 25 years and the option to renew at least once (50 years total).

Additionally, since most of the undeveloped land inside of Aeropuerto San Jose was leased by TWC, the authorities required clauses to "oblige" TWC to build/operate aviation infrastructure including customs warehouse, aviation school, aircraft workshop, private hangars, and the possibility of a national/international terminal. As part of this negotiation, the government covered the cost of the cargo platform built in front of the area designated for the customs warehouse and cargo operations.

The main pending compromise of the administration was to finish the construction of the renewed airstrip, control tower and other key infrastructure required to certificate the airport as an international cargo airport, at the very least.

By signing short-term contracts and then solving the main issues holding back the project, TWC was able to finally secure 50-year lease contracts on three strategic plots of land that, if developed in harmony, could generate asymmetric returns for TWC.

For TWC, the fixed monthly lease cost started around USD ~0.20 per m2 and progressively climbed during the first years, stabilizing at around USD ~0.40 per m2, then increasing with inflation on an annual basis. In comparison, depending on the business unit, expected monthly sublease price varied from USD 2.50 per m2 for undeveloped land to USD 10.00 per m2 for prime AAA industrial warehouse space located next to Puerto Quetzal.

Final result was a deal that resembled what would be a highly coveted PPP requiring Congress approval, structured as a set of private long-term lease contracts between TWC and IPM/EPQ, with the mutual obligation to build and operate certain types of infrastructure.

The combined strategy planned and executed by TWC created a massive upside opportunity for both TWC and the government of Guatemala.

Before TWC consolidated its plan, these three (3) plots of land were analyzed independently from each other by the federal government and by the Decentralized Public Institutions that own them, there was no integrated development plan and no vision to what such a plan could mean for an economy that is commonly driven by the private sector.

At the same time, other national and international companies did not dare to imagine and explore scenarios where the rules of the game could change to enable projects that were simply not possible before.

TWC was very successful at:

Identifying business opportunities (Project) not seen/explored before by the government or private companies;
Negotiating with public stakeholders to change rules that enable massive value creation for the identified Project;
Execute every step of the strategy as planned to obtain the contracts that allowed TWC to move into development and fund raising.

However, the Project later stagnated because of external factors that were not foreseen or adequately planned for.

At the moment of the signature of the final contracts, all funds required to structure and execute the project were provided by the founders of TWC.

International fundraising became complicated due to external factors:

i. Presidential transition from right to left, including a newly created left-wing party that was expected to hold leadership positions in Congress;

ii. Warnings of a possible coup planned by the right-wing;

iii. Revocations of VISAs and sanctions for government officials;

iv. Cancelation of the legal personality of the left-wing party and the legal impossibility for its newly elected Congressmen to preside any Commission in Congress and submit proposals;

v. Power vacuum created for the next four (4) years due to the legal impossibility for the new left-wing party to lead or exert influence in Congress;

vi. Suspension of all construction activities in San Jose Airport for an undetermined period of time as retaliation against the previous administration. The airport public works had an 80% advance at the time.

vii. Ongoing feud between the Attorney General and the sitting President that included accusations of a possible corruption scheme to cede control of Guatemala's seaports to China.

Notwithstanding the issues here listed, TWC was able to raise funds with private investors in Mexico with help of a non-binding contract signed with Nuvoil, a Mexican company with a joint-venture with Coastal Contracts (Malaysia). Nuvoil agreed to build/operate the midstream facility and proposed to do so through its JV with Coastal Contracts; however, its high dependence on payments from PEMEX delayed further progress.

Eventually, international investors regained trust in Guatemala and reactivated deal screening/negotiations but it proved to be too late for TWC as the company was not able to maintain compliance with its contractual obligations. This situation forced the suspension of all contracts and a distressed sale to a third party approved by the current administration.

Guatemala held presidential elections and political turmoil that ensued created complications for fundraising activities.

Reports from Washington warned about a possible coup. This confrontation alienated TWC from international investors.

Finally, the suspension of all construction activities in San Jose Airport and an ongoing feud between the sitting President and the Attorney General stained the image of TWC and the Project, further complicating fundraising.

Size of the Arbitrage

Cost base without variable fees (revenue share):

Monthly lease unit cost: USD 0.4 per m2

Amount of land leased: 830,000 m2

Monthly lease expense: USD 332,000
Annual lease expense: USD 3,984,000

*IPM has the right to revenue share based on TWC financials.

Revenue base without variable fees (revenue share):

Monthly lease unit price: USD 3.30 per m2 (average)
Amount of space leased: 830,000 m2
Monthly lease revenue: USD 2,740,300
Annual lease revenue: USD 32,883,600

Note: This vision simplifies a complex financial model.

Example 1: Industrial parks effectively lease 60% to 70% of available land as industrial warehouse space, therefore average revenue per m2 is diluted.

Example 2: Franja Este Puerto Quetzal is not leased to oil & gas partner, but a right of way (variable fee) is put in place to create revenue share.

Example 3: A significant area at Finca San Jose is left undeveloped until next administration confirms development of cargo airport.

Example 4: Variable fees depend on the overall financial performance of Midstream (oil & gas) and Energy (CCPP) business units developed and operated by a third party (strategic ally).

Potential upside with variable fees (revenue share):

Potential upside from Midstream (oil & gas) and Energy (CCPP) multiplies TWC revenue by a factor between 2x and 3x, creating solid financial returns and further accentuating asymmetries between cost to lease and fair market value of that land (land arbitrage).

Monthly lease unit price with minimum upside: USD 6.60 per m2

Monthly lease unit price with maximum upside: USD 9.90 per m2

Note: while TWC planned to directly finance and operate the industrial parks, hence the USD 250M raise effort, investments linked to Midstream and Energy infrastructure are absorbed by strategic partners in charge of the development and operation of those highly specialized business units.

Notes:

(1) Instituto de Previsión Militar (IPM) is a decentralized public institution created in 1966 in Guatemala, under direct supervision of the Ministry of Defense (MoD). IPM owns a large real estate portfolio thanks to continuous donations from the Federal Government; donations executed with the intention of accumulating assets capable of generating enough recurring revenue to cover the cost of social benefits and pensions of retired military personnel.

(2) Empresa Portuaria Quetzal (EPQ) is a decentralized and autonomous government entity (company) created in 1985 that owns/controls Puerto Quetzal, including over 8.35 million m2 of land inside the port and in the vicinity.

(3) Transshipping World Company, S.A. (TWC) is a private company acquired/restructured by a group of founders from Guatemala and Mexico, with the objective of proposing a large-scale infrastructure development project to the government of Guatemala and the entities that own/control the land (IPM and EPQ) required for the project.