Granvia, a 50/50 Vinci and Meridiam joint venture, closed the financing for the Eu1.254 billion ($1.7 billion) R1 toll road in Slovakia on 27 August 2009. The deal is an important one for Slovakia – it is the country's first PPP and will be quickly followed by deals for the D1 road phases 1 and 2, which are expected to finance by the first quarter of 2010.

All pathfinder deals are difficult, but the R1's progress to financial close was made even more complicated by the demands of the new lending climate. This spawned brinkmanship between the negotiating parties, brinkmanship which almost resulted in a breakdown of trust. After the concession had been signed, the lenders demanded greater government support. The sponsor 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 this offer. The Slovak government – perplexed by the sweeping changes to the original deal – threatened 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 final deal 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.

The negotiations began in February 2009 when Granvia and financial adviser BNP Paribas put out feelers to commercial lenders, the EBRD and EIB. Of the two multilateral lenders, 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 angst 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 BAFO, 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 the first of its kind in Slovakia, the R1 sets the template for future Slovak PPP financings. A consortium comprising Bouygues/Colas/Doprastav/Vahostav/ Intertoll-Europe/Mota Engil, with advice from RBS, is sponsoring the Eu2.4 billion D1 Phase 1, which will be the first to market.

The R1 was structured during tough times for the credit market and had no domestic precedent to follow – it was an extraordinary deal in extraordinary times. The close of the deal, and the legal and financial precedents it has provided, will ease the way for future Slovakian financings. But with stability returning to the financial markets future deals need to get done without two sets of amendment agreements and BAFOs need to be based on realistic worst-case costings if the fledgling Slovak PPP market is to proffer certainty and speed of deal flow.

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
Legal adviser to Granvia: Linklaters
Legal adviser to commercial lenders: Ashurst
Legal adviser to EIB: CMS Cameron McKenna