Companhia de Concessões de Rodoviárias and Encalsa closed the $1.47 billion financing for the RodoAnel Oeste road concession in Sao Paulo, Brazil on 3 December. The deal backs the acquisition and tolling of a 32km section of road around the city of Sao Paulo. The project is notable for including untied cofinancing from the Japan Bank for International Cooperation, and for its use of a subordinated tranche with automatic replacement mechanism.

The financing breaks down into a $100 million 15-year A loan from the Inter-American Development Bank, priced at 375bp over Libor, a $200 million 13-year B loan, funded by Banco Caixa Geral, along with Calyon and Banco Espirito Santo, which is priced at 350bp over Libor, a 15-year $200 million JBIC loan, priced at 375bp over Libor, $530 million in sponsor equity and a R750 million ($434 million) three-year subordinated loan provided by Bradesco, guaranteed by CCR, and priced at 117.5% of CDI.

The financing is a product of the uncertain credit markets of 2009, and is tailored to the circumstances of the Sao Paulo concessions programme, which has few comparables. But the subordinated loan offers an intriguing means of mitigating the risk attached to the ramp-up in toll road traffic levels, and is arguably better at dealing with cross-border and currency risk than the alternatives.

RodoAnel Oeste is a 32km section of an orbital road running to the west of the city of Sao Paulo, and has been open since 11 November 2002. The state of Sao Paul decided to fund the building of additional sections of highway by auctioning a 30-year concession to toll and operate the western section to a private sector operator. The concession-based real toll structure is not a new one in Brazil, though governments have not usually concentrated as much on the fee-generating potential of such assets.

CCR currently runs 1,571km of roads in Brazil, and its shareholders include Brisa and Camargo Correa (each with 16.35%). Encalsa, a local construction firm, has a 5% stake in the project, while CCR owns the remainder. The sponsors won the bidding for the concession in March 2008, signed a concession agreement for the road in May 2008 and started tolling on the road on 17 December 2008. Initial rates are R1.20 per car, or R1.20 per axle for commercial vehicles. The road had not been tolled for the previous six years, and so the sponsors had a modern, operational asset with no tolling history.

The concessionaire was on the hook to pay a concession fee of $2 billion, of which 10% of the total was payable at signing, and the remaining amounts in 24 equal instalments. The two also had to spend up to $200 million over the first half of the concession, including, most pressingly, installing tolling equipment.

Their plan was to ultimately finance the concession with a seven-year mini-perm from commercial lenders, though initial expenditure was funded by a combination of loans, from UBS Pactual, Santander and Itau, a R650 million six-month issue of commercial paper led by Bradesco and Santander, as well as equity.

Following the events of September 2008, the likelihood of finding competitive commercial bank debt to fund the concession became as likely as relying on loans from Brazil's development bank BNDES, which is banned from financing concession payments. The Inter-American Development Bank, which had been monitoring the project since July 2008, offered to assemble a longer-dated multilateral package.

Key to the composition of the senior debt was JBIC, which is providing debt to the project without the presence of Japanese content or equity, and has never done a toll road transaction before. JBIC came into the transaction in part because several Japanese-owned businesses are likely to benefit from the road, and the leaders of the two institutions put together a memorandum of understanding for co-financing on 31 March 2009.

The experience was not entirely foreign to JBIC, which provided some direct lending to Sao Paulo state to build the tunnels for the ViaQuatro metro PPP, in which Mitsui had a 10% stake. But JBIC's exposure to traffic risk is a first. Lenders benefit from a five-year hedge of Libor and a 24-month hedge of exchange-rate risk, both provided by the three B loan lenders, with the swap fees designed to attract their participations. Portuguese bank Caixa Geral was the first to commit, and Calyon and BES joined later.

But the deal's most interesting structural feature is the R760 million subordinated loan from Bradesco and the arrangements that are in place to take it out. The Oeste section will not reach its planned vehicle capacity until a second section of the road, the RodoAnel Sul, is operational. The state is building this section, with a scheduled completion date of March 2010 and its intentions for the tolling of this section are not clear.

The subordinated debt, which has a corporate guarantee from CCR, provides a cushion against the road not reaching its projected capacity, and can only be replaced by senior debt if several conditions are met, and at two specific moments. The first moment is nine months after the opening of the Sul section, and the second is 21 months after the opening. Bradesco, while lending with the benefit of a corporate guarantee, stresses that it performed project-level due diligence on the road and insisted on a position in the cash waterfall above equity distributions.

The Sul section must be open, and traffic must have reached acceptable levels, and the road must be maintaining a minimum debt service coverage ratio of 1.5x at the first opening and 1.4x on the second. The exchange rate hedge must be extended by a year, and the debt that replaces the subdebt must have a maturity of at least as long as the B loan, would rank pari passu with the senior debt, and could not be converted into dollar senior debt at an exchange rate of less than R1.9 to the US dollar. This last feature prevents the dollar's depreciation from subjecting the concession to unsustainable leverage. Fabio Russo, CCR's head of project finance, adds, "the biggest advantage of the structure is the automatic ability we have to releverage. We're very clear on what the rules are and we don't have to go back for approvals. This is very important."

The IDB has approved a second B loan, or B2 loan, of $395 million for this refinancing, though it has not selected lenders for this tranche. The sponsor is not obliged to use the proffered B loan, and might approach another multilateral, a commercial bank, or even local bond investors to take out the debt, so long as they accept the existing security package. On 21 October the IDB approved the financing, and documents signed on 3 December.

There was considerable international scepticism when Brazilian governments suggested that they might follow Mexico's lead and extract large concession fees from toll road operators. However, by shouldering construction risk, the awarding authority maximises its proceeds from new roads, and can recycle this capital for future sections. By cultivating offshore sources of long-dated project much more consistently than Mexico's government, it has produced a resilient method of financing these concessions during a tough period in financial markets.

Concessionária do RodoAnel Oeste

Status: Closed 3 December 2009
Size: $1.47 billion
Location: Sao Paulo, Brazil
Description: 32km tolled section of orbital road
Concession awarder: ARTESP
Sponsors: CCR (95%) and Encalsa (5%)
Equity: $530 million
Senior debt: $100 million IDB A loan, $200 million JBIC loan, $200 million B loan, $395 million approved but contingent B2 loan
B loan and hedge providers: Banco Caixa Geral, Calyon and Banco Espirito Santo
Subordinated debt: R750 million
Subordinated debt provider: Bradesco
Insurance: Willis
Independent engineer: Mott MacDonald
Traffic consultant: TTC
Lender legal counsel: Clifford Chance (international); Machado, Meyer, Sendacz e Opice (local)
Sponsor legal counsel: Mayer Brown (international); TozziniFreire (local)