The PPP roads market in Central & Eastern Europe is picking up in volume terms, despite the gloomy lending climate. Financings for the D1 Phase 1 and R1 in the Slovak Republic are nearing close – albeit very slowly. The term sheet for AWSA's A2 deal in Poland is out to banks with commitments expected before the end of June. Bids have gone in for Hungary's M3 concession and the D1 Phase 2 in Slovakia. And Cintra and Budimex have also mandated banks on the Eu2.1 billion 35-year A1 (Strykow-to-Pyrzowice) concession in Poland.

But the markets are not without difficulty. Many tenders have resulted in court disputes – Strabag and Porr initially contested the awarding of the R1 to Vinci and Meridiam Infrastructure, and most recently Strabag/Egis/Eurovia have filed an appeal against disqualification on the tender for the Eu1.5 billion A3 30-year toll road concession (from Conarnic to Brasov) in Romania. The dispute is over the reasoning behind their losing the deal to Vinci and Aktor which came in with a NPV bid of Eu1.5 billion, Eu300 million more expensive than the Strabag/Egis offer.

In addition to lengthy legal disputes, putting bank debt in place remains a slow process, not least because there is no underwriting appetite. Only club deals are getting done – but with small individual ticket sizes, clubs have grown to a dozen or more lenders, which makes term sheets unwieldy to negotiate.

For example, the financings backing Bouygues' D1 Phase 1 and Vinci's R1 have already had to negotiate no-penalty extensions to putting financing place. Amendments to the D1 Phase 1 concession have been agreed with the government, but the Bouygues-led consortium – which includes Colas, Doprastav, Vahostav and Mota Engil with advisory from RBS – is unlikely to get the Eu2.4 billion deal signed before October. Similarly, the Eu1.1 billion R1 deal, although working towards a June close, could yet be scuppered by a stand-off between the sponsors and the government over a 25% increase in NPV on that given in the BAFO.

The slow process of putting financing in place is also reflected in the way contracts are now being awarded. In January the Polish government awarded the Eu2.1 billion A1 concession to Autostrada Poludnie – a consortium led by Spanish operator Cintra together with local partner Budimex. The deal has recently been mandated to banks, but a clause in the contract gives the consortium 12 months in which to propose adjustments to capital costs and traffic projections which may be impacted by the economic crisis. The 25-year PPP contract is therefore temporarily suspended until the consortium can put full financing in place.

The move to availability regimes

On the plus side, most of these transactions are now based largely or purely on availability payments, which makes them more bankable (an anomaly is the A3 deal in Romania where availability only covers 75% of O&M costs). And in some cases – the A2 in Poland for example where AWSA (a consortium comprising Strabag, Meridiam and Electroenergy) is out to market with a facility of up to Eu600 million of 20-year debt priced at 325bp to 400bp over the first 10 years via advisers Calyon and Deutsche Bank – the government is guaranteeing the debt.

The move to availability payment regimes is EU-wide. "Road PPPs in countries such as Ireland have nearly all required the project company to bear demand risk with very limited forms of availability deductions, but in the current economic climate the market appears to be moving more towards pure availability based structures," comments Chris Brown, partner at Norton Rose in London.

"If you include demand risk, then there have to be various protections for sponsors and lenders, such as compensation if competing routes are built, which may impact a toll road's business model, and this may not always be the best solution for transport policy requirements," says Brown.

"Also, if you already have a very high percentage of government support in the form of availability payments or grants, including demand risk will simply increase the pricing that the banks are going to require," he adds. "Bank lenders will extract a high price for taking revenue risk, which makes even less sense when toll road revenues only service a small part of the overall cost of the project. In the present economic climate, where bank debt is in short supply, it doesn't always make sense to include demand risk, since PPPs based on availability payments are much more bankable."

With a combination of multilateral support and commercial bank club loans a number of financings are set to close in 2009. And though margins on bank debt are high compared to two or three years ago, pushing up though 400bp, interest rates are historically low so the absolute cost of debt is not prohibitive.

Crucially, the major road developers also have access to the capital markets at the corporate level, allowing them to continue to bid aggressively on new roads across Europe. In the current difficult environment, bank lenders are looking for a strong sponsor to minimise construction and operational risk, so the involvement of the big toll road players is critical.

After shutting down in the fourth quarter of 2008, investor appetite in capital markets has returned quicker than expected this year. This access to capital markets funding has so far helped toll road operators to avoid downgrades, in spite of rapidly falling traffic numbers on toll roads in their key home markets such as Germany, France and Italy. Thus they are well positioned to ride out the current economic crisis, and taking advantage of opportunities in Central & Eastern Europe remains a priority.

Slovak roads

Of all the deals in the market the R1 in the Slovak Republic is nearest to financial close. A pure availability payments-based project, bankers are hoping for financial close by the end of June, although that now looks unlikely.

"We are all working night and day to achieve close by the end of the month, and are moving forward on the basis that the deal will be fully taken up by 12 banks in the club, though obviously other banks may yet join," comments one lender on the deal. Lenders are expected to include BBVA, Santander, WestLB, Mizuho, Unicredit and BayernLB as well as R1 financial advisor BNP Paribas.

The R1 is the first concession contract for a motorway project in Slovakia and was awarded by the Ministry of Transport, Post and Telecommunications to the Granvia Consortium in 2008. Granvia was set up under Slovak law by Vinci Concessions (70%) and private equity investor ABN Amro Highways (30%), though the latter is currently 100% owned by Vinci Concessions.

According to Vinci, the R1 contract will come into force 'when the financing arrangements currently underway are finalised.' Such a clause is typical in the current environment. Whereas two or three years ago a typical PPP bid included committed financing from a group of banks, in today's market such underwriting commitments are not available, so governments often want to make a concession award contingent upon financing being put in place within a set time period.

The Granvia consortium is advised by BNP Paribas, which has opted to go for a ten-year soft mini-perm structure, which has been marketed to banks around the 350bp level but is expected to step up to beyond 400bp during the life of the loan.
The PPP contract involves building and maintaining the 52km of road running between Nitra and Tekovske Nemce, to the east of capital Bratislava. Under a 30 year concession agreement an annual royalty is to be paid by the grantor.

The EPC contractor is Stavby Silnic a Zeleznic (SSZ), which is a wholly owned subsidiary of Eurovia (part of the Vinci group). The Eu900 million of works will be carried out by Granvia Construction, which is a subsidiary of SSZ, and the road will be operated under Vinci Concessions.

Slovakia is a new PPP market for roads and has opted to go with a satellite based tolling system for its Eu4-5 billion overall roads programme. Tolls will be levied on HGVs over 3.5 tonnes. A Sanef led consortium won the contract, worth Eu852 million, which covers the implementation of the system, and its operation for 13 years. In addition to collecting the tolls for the Highways Authority and B to B customer management, the consortium will also supply and maintain onboard ETC equipment, verification/payments systems and data systems.

The various road segments are being built under PPP deals with availability payments made to sponsors under DBFO concessions. Thus there is no traffic risk for either sponsors or bank lenders. Nevertheless, multilateral involvement remains an important element of financings – the European Bank for Reconstruction and Development (EBRD) is tipped to come in with a Eu250 million senior loan on the R1 for example.

The phases of the D1 motorway – the other major Slovakian route – are at different stages. Bouygues is expected to get the D1 Phase 1 to financial close this year, while the tender for the D1 Phase 2 has only pulled in one bidder – Hochtief PPP Solutions, Alpine Bau, FCC and Western Carpathians Motorway Investors Company – from a shortlist of three. The project is a technically challenging and expensive section and includes stretches from Hricovske Podhradie to Lietavska Lucka, from Lietavska Lucka to Visnove and a 7.5km tunnel between Visnove and Dubna Skala.

"All these projects will be financed on a club basis, and I don't see anyone coming in for more than Eu100 million, with tickets more likely to be in the Eu50 million to Eu75 million range," comments a banker in London.

"Long tenors are still a problem for us at the moment," he adds. "But the fact that Slovakia is now in the Eurozone does make it more attractive, and we would find it more difficult where availability payments were not in Euros but another currency such as the Zloty," he adds.

Multilaterals and currency mismatch

Slovakia joined the Eurozone on January 1 of this year. It has thus avoided the volatility experienced by currencies such as the Hungarian Forint and Polish Zloty in the wake of the current phase of the global financial crisis triggered by the collapse of Lehman Brothers.

Currency mismatch was less of a problem for project lenders in the buoyant environment of 2006 or early 2007, but in a risk averse environment currency exposure has gained more attention. And extreme volatility has made hedging of risk much more expensive, and only available for shorter durations.

Thus local currency tranches may be needed in some road PPPs. Bankers note that on the R1 transaction in Slovakia the EBRD is essentially just one more member of the club, albeit one with deep pockets that can take a bigger ticket than the commercial banks.

In contrast the multilaterals will have a more important role to play on deals such as those in Romania or Poland – for example the EIB is looking to provide and cover a Eu1 billion loan for the A2 in Poland without any commercial bank guarantees. And because multilaterals can raise long term funding on local capital markets, they are also in a position to provide long term local currency financing, which will help lessen the risk profile of a parallel Euro denominated commercial bank loan.