The economic stimulus package in Germany has had an unexpected negative side effect on public private partnership (PPP) projects – states and municipalities have rushed to spend money directly on infrastructure, rather than go down the more time consuming PPP route. However, the federal elections in September returned Angela Merkel and the CDU/CSU to power with a new coalition partner, the business friendly FD. The new government is viewed as committed to the PPP model.

The deal pipeline might still be slow in the first half of 2010, but it is then expected to pick up again, and a long list of motorways, hospitals, prisons and schools tenders are being prepared. Many smaller schools deals tend to be done via the forfaiting model, but non-recourse project debt will be needed for the other projects. And despite the difficult credit environment, bankers anticipate that commercial bank debt will be accessible, though alongside tranches from the European Investment Bank (EIB).

"Initially it was thought that the economic stimulus programme would also strengthen the PPP market, but it turned out that most of the money has been spent on conventional infrastructure projects, mainly because of the tight deadlines for spending the money, and the fact that PPP deals need more time for structuring and preparation," comments Dirk Buellesfeld, principal associate at Freshfields Bruckhaus Deringer in Hamburg.

"Nevertheless, the expectation is that during 2010 there will be another strong push for the PPP market in Germany," he adds. "There appears to be plenty of interest from sponsors on the equity side, though clearly the debt side is more difficult, with larger groups of banks each taking a smaller piece of the debt, which doesn't make deals any easier to negotiate. As the European Commission recently confirmed, the EIB is expected to be involved in many projects, alongside the commercial bank lenders."

New deals

Two major projects, the A8 and A9, are already under tender. The A8 bidding could be finished by the end of 2010, although early 2011 is regarded as more realistic by some market participants. The A9 is likely to follow a few months later.

"The A8 is structured in a similar way to the first four pilot road PPPs, though there is a change in the remuneration which will be based on the average shadow per heavy goods vehicle using the road, instead of the tolls based on which category a vehicle falls into," explains Dirk Trautmann, partner in the Munich office of Norton Rose, which has acted as advisor to the government on all the A-Model and the coming F-Model roads.

"There are eight categories for tolling of heavy vehicles based on emission standards and numbers of axles, and previously the private sector was taking risk on the mix of vehicles using the motorway, which was hard to predict – so having a flat Euro cent amount per truck should make life easier for all parties," says Trautmann.

Under Germany's satellite based tolling system, trucks weighing more than 12 tonnes are charged for using stretches of motorway by Toll Collect, a subsidiary of Daimler, Deutsche Telekom and Cofiroute. The tolls levied are directly transferred to the Bundeskasse. VIFG, the German federal toll company, itself has access to the Bundeskasse and pays the concession company via the relevant state government.

Under the existing system sponsors run the risk that a higher proportion of more environmentally friendly trucks will use the stretch of motorway, thus leaving it with a larger share of lower tolls. Thus the move towards a flat rate is welcomed by sponsors and bankers as being much more predictable.
"Furthermore, the structure being used on the A9 in Thuringia is different to the pilot projects, since payments will be availability based, and as more road projects with different characteristics come to the market we would expect to see a growing number done on an availability basis," adds Trautmann.

EIB involvement

The EIB-backed A5, the last of the pilot A-Models which reached financial close in February, provides clues as to what the A8 financing may eventually look like given it is expected to also feature heavy EIB involvement.

The A5 moved to financial close with the help of a Eu200 million 28 year loan from the EIB, together with an additional Eu25 million Loan Guarantee Instrument for TEN-T projects (LGTT), the financial instrument introduced by the EIB to facilitate bank funding for Trans-European Network (TEN) transport projects that are subject to revenue risk.

Another Eu220 million was provided by a club of four commercial banks, BBVA, Santander, KBC and NIBC. This was structured as an 11 year mini-perm, and priced at a margin of 200bp to 225bp during construction and in the early years of operation. There is then a 100bp step up at the refinancing date, and a cash sweep.

At time of loan refinancing, the LGTT is designed to help partially repay the senior debt where a certain traffic downside threshold is met. This not only helps the refinancing if there is a shortfall, but also improves the senior lenders' position through the life of the loan by improving the cover ratios for the outstanding senior debt. If the LGTT guarantee is called upon, then the EIB becomes a subordinated lender to the project, ahead of any payment to the equity providers.

The LGTT has helped banks get involved, and in general bankers suggest that the EIB has improved in its ability to get involved in PPP projects. "They are quicker than before, and not as difficult to deal with," comments a market participant. "They will certainly be needed on big deals with investment volumes of around Eu600 million, though they also tend to get involved in some smaller Eu200 million to Eu300 million projects, which does have something of a crowding out effect on some commercial banks who might otherwise lend."

Indeed, though EIB involvement is crucial for large projects, in general bank debt continued to be available. "We saw some projects cancelled by public entities because their advisors told them that debt would not be available, which is total nonsense," comments one financial advisor. "In fact we have had banks contacting us and asking if they can come in on our next deal."

In spite of structural enhancements such as the LGTT, bankers would clearly prefer to see the German road market move towards availability structures – as already used in German hospital and prison PPPs – or a mix of availability with a small slice of traffic risk.

"Certain elements were not good from the risk reward perspective – German roads with traffic risk are not the hottest deals on earth," says a banker who lent into some of the early deals. "The project company has no influence on the setting of toll levels, and some of the forecasts have been rather ambitious. And despite all risk placed with private sector they still achieved availability type margins with bank lenders. Some of the public entities sometimes forget the third P in PPP," he laments.

Though a few bankers may complain about too much risk and tight margins, the German PPP model remains attractive to both sponsors and many lenders, and players such as Hochtief, Bilfinger Berger, Strabag and Vinci still all see Germany as a core market for their PPP activities.

But the public equity markets are still fragile difficult to tap while the market absorbs fallout from Dubai World. What analysts saw as the overambitious pricing – Eu1 billion – by Hochtief for its very recent Initial Public Offering of its Hochtief Concessions unit led to the deal being pulled.

Equity recycling

Private investors such as global infrastructure funds are, however, still showing strong interest in also PPP assets, and the big construction company PPP sponsors are confident that they can recycle equity as and when needed, by bringing in portfolio investors on concessions that are aready up and running.

For example, Bilfinger Berger Project Investments currently has a European portfolio of 19 deals with total equity of around Eu220 million, and Frank Schramm, managing director of Bilfinger Berger Project Investments in Europe, sees a good level of interest from insurance companies and pension funds, as they need conservative long term investment opportunities.

"During 2009 we have seen half a dozen infrastructure equity packages up for sale, some of them by distressed asset sellers, but once these packages clear the market there should be plenty of interest from investors in PPP equity," he says. Bilfinger has recently been sounding out the market about bringing in new equity investors, as part of its asset management process.

But the big PPP players are well capitalised, and can execute deals when the price is right. Certainly, in spite of a fairly minor adjustment in debt to equity ratios, equity seems to be plentiful in the current market.

"Cover ratios have tightened, and therefore debt to equity ratios have risen a little bit, but it has been a marginal increase from around 7% to 10% on availability based deals," says Schramm. "And on the debt side, the situation has not been as difficult as some expected – we were able to raise long term financing on deals that we had in the market throughout 2009, without any cash sweep elements." In addition to motorways, Bilfinger Berger projects include the Burg Prison in Saxony-Anhalt and the Particle Therapy Centre in Schleswig-Holstein.

More deals in the hospital and prisons sectors are coming during 2010. At time of going to press, the naming of the preferred bidder on Cologne Hospital was imminent. And two more sizeable projects are at the early stage of studies required before tenders are invited, in Lubeck and Kiel.
Partnerschaften Deutschland (OPP) is involved in giving advice on these hospital deals. OPP was set up with the aim of offering advice to public sector entities on how to execute PPPs, and is now fully staffed and up and running.