The Portuguese Accounts Court has added the Litoral Oeste and Algarve Litoral road concessions to its list of projects that have been preliminarily rejected ratifying visas. In total, the Court has now rejected five of the six financed new road concessions, with only one concession outstanding – Baixo Tejo.

The Eu600 million ($904.9 million) Litoral Oeste concession is sponsored by a Brisa-led consortium and closed at the end of February. The deal was structured with front ended availability payments to enable the debt to be fully amortising rather than featuring refinancing risk as in the non-Brisa mini-perm deals of the other concessions.

The Eu350 million Algarve Litoral is sponsored by Iridium, Edifer and Dragados and closed at the end of April 2009.

The Accounts Court's rejection of Algarve Litoral and Litoral Oeste follows its rejection of Douro Interior, Transmontana and Baixo Alentejo. While the Court's rulings are preliminary and have no legal bearing on the project financings, if the Court's decisions are upheld as final rulings it will be an event of default that leaves Estradas de Portugal (EP) to repay full breakage costs to sponsors and banks.

On Tuesday 17 November, EP presented its appeal to the Accounts Court with a blow-by-blow account of how the timeline of indicative bids and BAFO stages coincided with the collapse of Lehman's and the global financial meltdown. EP presented data such as stock market prices and Libor rates as evidence of the dislocation in the market.

An explicit term of the tendering documentation is that the BAFO bids cannot be higher than the indicative bids, a technicality that the Accounts Court has jumped on and was breached in all of the six financed road projects. EP's argument is that the global market meltdown was an extraordinary event that required the formal tendering procedures to be modified.

EP further argues that as it is run as a separate entity from the government (without a guarantee) and can raise debt and pay the concession fees from its own budget, the road program does not fall within the remit of the Accounts Court. The Accounts Court argues otherwise. Two competing groups of lawyers now hold opposing views as to whether the decision can be appealed: EP's lawyers have held that the Accounts Court decision can be appealed to the constitutional court and the Accounts Court lawyers have held that the Court's decision is final.

While the Accounts Court motivation for refusing visas had been assumed to be a temporary chastisement of EP for ignoring procurement law, according to market participants it now appears that the Court's position has hardened and it will seek to modify the refinancing sharing terms in some of the concessions.

Under standard Portuguese PPP contracts any refinancing upside should be shared 50/50 between the private consortium and the public sector, however as most of the soft miniperms in the new roads program were bid aggressively, with sponsors assuming refinancing risk, the private sector was granted a greater share in the upside to boost their IRRs. Exactly how these concession contracts can be altered, or which party will bear the cost, is unclear – although it seems EP will backstop the changes.

The relationship between EP and the Accounts Court has soured, with EP releasing a public statement giving its side of the argument. Banks and sponsors are growing restless with EP, and it is coming under increasing criticism for dismissing the Accounts Court's jurisdiction and not building informal relationships with the Court earlier.

Negotiations between the parties are ongoing, and there is no set date as to when the Accounts Court will make its final ruling. It has 30 days from the preliminary ruling to make a final decision, but this is fairly arbitrary as the Court can stop the clock to receive more evidence and data.

There is huge political will behind resolving the problem and progressing the roads program. Paulo Campos, the Secretary of State of Public Works, is directly involved in the dispute. One banker says pragmatically, "My feeling is that if the consequences of the action far outweigh the cause, a solution will be found." Rumours are already circulating that the board of EP could be changed ahead of the scheduled board change in March 2010, to make it more conciliatory.

The banks lending into the projects that have preliminarily been refused visas have been going through the wording of the project documentation with a fine tooth comb to try to block further drawdown to the projects before the equity guarantee thresholds are met.

However, it appears all legal manoeuvres have been exhausted because the non-granting of the visa was specifically envisaged within the project documentation and cannot be covered by either force majeure or change in law provisions. Banks are legally obliged to disburse their loans up to an amount equal to equity guarantees (or a proportion thereof), which are in turn counter-guaranteed by minimum A- rated Iberian banks.

Most of the concessions allow drawdown up to 100% of the equity guarantee, but at least one concession – thought to be Baixo Alentejo – only allows drawdown up to 80% of the guarantee. The banks in the other concessions are similarly hoping to reduce this threshold, but legally they are on weak ground. Once these thresholds are met, project banks will not allow further drawdown until a ratifying visa is granted by the Accounts Court.

Project lenders can take comfort from the fact that they are not exposed to any project risk until the visa has been granted and will be protected by counter-guarantees backstopped by the sponsors, which are in turn backed by Estradas de Portugal. The counter-guarantee banks and project banks (which are often not mutually exclusive on an individual project) are still looking closely through to the corporate credit of the sponsors – although in the last instance EP is on the hook for full severance costs and its solvency could now be threatened.

The lending banks to Transmontana are particularly nervous because the sponsor group Soares da Costa, FCC and Ramalho Rosa is not the strongest and sizeable hedge positions were put in place as soon as the project was awarded. If a default occurs, large swap breakage costs as well as the debt would need to be recovered.

It is ironic that at the beginning of the roads program the perceived major hurdle was the unusual status of EP and its effect on creditworthiness and liquidity – EP is a wholly owned state company without a guarantee, and as such could theoretically go insolvent or be privatised. EP's uncertain status was thought to be the key reason why many international banks stayed away from the program. However, the program has overcome liquidity constraints and may now fall victim to a legal issue emanating from EP's own perception of its status as a quasi-private company and its legal standing in relation to the Accounts Court.