Granvia's (Vinci/Meridiam) financing of its Eu1.254 billion ($1.8 billion) R1 toll road in Slovakia was the country's first PPP, and was therefore a pathfinder for future Slovak deals, such as D1 road phases 1, 2 and 3. Apart from its status as a first for the Slovak market, the R1 was financed under extraordinary conditions and demanded complex negotiation.

The demands of the lending climate in late 2008/early 2009 meant that negotiations between all parties ran on late into the deal and efforts had to be made to avoid a breakdown of trust. For instance, after the concession had been signed, the lenders demanded greater government support. Granvia was forced to increase the net present value of its best and final offer (BAFO) because of rising costs and because it was unable to secure bank commitments at the time of the offer. This led to the Slovak government threatening to pull the concession.

Granvia submitted its BAFO in November 2008 and was awarded the 30-year PPP concession in December. The design-build-finance-operate (DBFO) project involves the construction of three dual-carriageway stretches between Nitra and Tekovske Nemce and the Banska Bystrica Northern Bypass. Construction is expected to be complete by July 2012, and the state will begin making availability payments in September 2011 for the portion of the road that is operational.

The 25-year term loan is a soft mini-perm priced at 325bp over Euribor during construction, rising to 350bp at year six, 375bp at year eight and 450bp at year 10. The deal includes a 50% cash sweep from year eight, which becomes a full cash sweep at year 10. The debt-to-equity ratio is 87:13, the average debt service coverage ratio is 1.25x and the loan life coverage ratio is 1.3x, based on a sculpted profile that assumes a successful refinancing in year 10.

The financing comprises Eu984 million of debt – including Eu200 million from the EBRD – from a club of 12 banks: BNP Paribas, BayernLB, BBVA, Calyon, Dexia, Erste Bank, HVB/Unicredit, ING, Natixis, NIBC, Societe Generale and Unicredit Slovakia. There is also a Eu32 million VAT facility and Eu149 million of equity/sub-debt from Granvia. The remainder of the project costs are financed by a partial unitary charge received during the construction period.

Negotiations started in February 2009, when Granvia and financial adviser BNP Paribas started to sound out commercial lenders, the EBRD and EIB. Of the two multilaterals, only the EBRD committed. However, negotiations with the commercial banks were more hopeful. The consortium and 12 commercial banks signed a support letter and term sheet, and a launch meeting for the financial documentation was organised in Paris on 7 April.

Although the Slovakian government signed the concession agreement on 23 March 2009, an amendment agreement followed on 22 April at the request of the sponsor. The amendment agreement – born of worry that the deal would struggle to close in the illiquid lending climate of the time, the fact that the PPP model had no precedent in Slovakia and because there is little supporting case law in Slovakia for instruments such as hedging and step-in rights – contained a provision for changes to the original concession agreement at the request of Granvia and the prospective lenders. Those changes included a backstop from the public authority.

In May, the lending group approached the Slovak government again – this time for a provision for termination payments underpinning 90% of the project debt. Lenders were uncomfortable with the procurement risk and termination regime.
The request for underpinning, combined with a significant increase in the sponsor's Eu1.5 billion NPV at the BAFO stage, almost derailed the deal. The Slovak government was vexed by the demand for extra support, given it had already tried to foster bank comfort by rushing through an amendment to the procurement law that limited legal challenges to the project to one month from signing, as opposed to what had been a statutory 12 months. And while Granvia argued the higher NPV was applicable under the amendment agreement signed in April, the government threatened to pull out unless Granvia agreed to a price closer to its BAFO.

Financial close was originally set for 30 June and was delayed by the negotiations between Granvia and the government over the price increase, and between the lenders and the government over the underpinning. During a meeting on 17 July, the government approved a cost increase of Eu540 million – pushing up annual availability payments from Eu109 million to Eu127 million – and signed a second amendment agreement with Granvia on 23 July. This agreed the final charge and clarified the termination formula in the event of concessionaire default. However, the government rejected the call for underpinning and instead committed to compensate based on the NPV minus the cost to complete the project.

As well as having no domestic precedent to follow, the R1 was a deal that was structured during hard times in the credit market. As Kristof van Loon, project manager of structured finance at Vinci Concessions, put it: "Because of lenders' risk aversion in the first half of 2009, we had to go to the documentation stage only supported by senior management approvals, lacking the necessary official credit committee approvals for underwriting the vast majority of the debt. In normal market conditions, anyone would say that we would be out of our mind to do that. But we were determined that we could get the deal done, and we did."

R1
Status: Financial close 27 August 2009
Description: Construction of three dualcarriageway stretches between Nitra and Tekovske Nemce and the northern bypass of the city of Banska Bystrica, Slovakia
Sponsors: Granvia, a 50/50 Vinci/Meridiam consortium
Mandated lead arrangers: BNP Paribas (also financial adviser), BayernLB, BBVA, Calyon, Dexia, Erste Bank, HVB/Unicredit, ING, Natixis, NIBC, Societe Generale and Unicredit Slovakia
Multilateral: EBRD
Financial adviser to Granvia: BNP Paribas
Financial adviser to government: PricewaterhouseCoopers
Legal adviser to Granvia: Linklaters
Legal adviser to commercial lenders: Ashurst, Ars Iuris
Legal adviser to EIB: CMS Cameron McKenna
Consultants: Atkins, KPMG, AON