ViaQuatro: Brazilian PPP, at last

ViaQuatro's São Paulo Metro Line IV concession was the first public-private partnership to be executed in Brazil. Although the financing featured some complex quirks, it represents a marriage of commercial concession requirements with the government's nascent procurement strategies. Brazilian PPP has been a possibility for a number of years, but the metro deal is the first to deliver on the country's promise.

The 30-year concession involves provision of rolling stock, trains and technical equipment, and the operation of a 12.8km metro line in the city of São Paulo. The ViaQuatro consortium was awarded the concession in August 2006, and comprises CCR (58%), Montgomery (30%), Mitsui (10%), and RATP and Benito Roggio (1% each).

The financing closed in October 2008, with debt arranged by the Inter-American Development Bank (IDB) and a club of seven banks. The debt is split in two tranches, a $69.2 million, 15-year A loan from the IDB, and a $240 million, 12-year B loan from Banco Santander, SMBC, KfW, Banco Espirito Santo, BBVA as lead arrangers taking $37 million each, and Société Générale and WestLB as co-lead arrangers, each taking between $35 million and $30 million. The A loan was reduced from around $90 million and the B loan was increased as the latter was oversubscribed. The B loan was priced at just under 200bp, rising to 250bp over the life of the debt, and the A loan priced at 30bp higher than the B loan, with the pricing stepping up at the same rate.

The project's revenues will come from a combination of passenger fares and yearly availability payments of R$75 million ($32.7 million). The concession was awarded on the basis of the lowest bid for required availability payments. The concession also benefits from a minimum revenue guarantee and revenue-sharing threshold, protecting the concessionaire from low revenues, but providing the state with revenue sharing if use is higher than projections.

The state of São Paulo's civil works authority is constructing the tunnels and train lines. The World Bank and JBIC provided the public sector with direct financing for the construction of the tunnels. The state performs the civil works before turning over the supply, operation and maintenance to ViaQuatro. The concessionaire will install the trains and the technical and signalling systems and then begin operations on the eight-station line.

The project was not eligible for support from the Brazilian government's development bank, BNDES, because the trains for the project were manufactured outside of the country. Hyundai (South Korea), Roten (Italy) and Siemens (Germany) are constructing the metro trains. As with several other CCR-led projects for which the IDB is providing financing, such as ViaOeste and AutoBan, the sponsor is planning to refinance the debt in the domestic capital markets.

There is a second phase to the project, which would require the concessionaire to open additional stations on the existing line and add between five and fifteen more trains, at the discretion of the State of São Paulo, at any time after the second year of commercial operations.

This led to variables in the concession structure that made arranging the financing more challenging. The timing, the size and even the certainty of the second phase of the project are undetermined. Another complicating factor is that the government is not obliged to complete the construction in its own identified timeframe, by the first quarter of 2010. However, the state required the concessionaire to have committed financing for both phases. In response to this two-phase obligation, the IDB structured its commitment as a limited recourse, two-tranche A loan, providing up to 25% of the total investment cost for each phase. The financing includes provision for a second A loan, of $59.5 million, and another B loan of undetermined size, for the expansion of the project, in a probable two-to-four year period.

John Graham, a senior investment officer at the IDB, notes that the construction, supply and operations contracts run back to back, and the financing had to align with these three factors, even if their start dates were subject to delay. The amortisation schedule was calculated to allow for the maximum possible delay in construction. However, the loan agreements also allow for the possibility of early prepayments of principal if operations begin in 2010 as planned. He explains, "The effect was to give ViaQuatro the flexibility to get its operations up and running, while allowing the IDB the right to require principal amortisation once the deal has the free cash."

The debt structure also allows for some flexibility in the construction phase. Although the two maturities are inclusive of the construction phase, at 12 and 15 years door-to-door, the interest-only grace period lasts as long as construction. Principal repayments on both tranches only begin once the asset is in operation. So, should the construction phase take two years, the principal repayments will be made over ten years for the B loan and 13 years for the A loan. However, the longer the construction takes, the larger the installments, and the shorter the time to service the debt.

The state is using the deal as a template, if a rather complex one, for its next project, Line 5 of the Metro. While the market may dictate a greater degree of multilateral financing for any future deal, if the constraints on commercial lending continue, the precedent of flexibility offered by the lenders for this deal could benefit sponsors on future Brazilian PPP projects.

ViaQuatro
Status: Closed 7 October 2008
Size: $515 million (historic cost)
Location: São Paulo, Brazil
Description: 30-year concession of metro line
Awarding authority: State of São Paulo
Sponsors: CCR, Montgomery, Mitsui, Benito Roggio, RATP
Debt: $69.2 million A loan, $240 million B loan
Maturity: 12 years (B loan), 15 years (A loan)
Lenders: IDB, Santander, SMBC, KfW, Banco Espirito Santo, BBVA, Société Générale, WestLB
Paying agent: Deutsche Bank
Lender legal: Fulbright & Jaworski (international), Felsberg & Asociados (Brazil)
Sponsor legal: Mayer Brown (international), Machado, Meyer, Sendacz e Opice Advogados (Brazil)
Independent Engineer: Arup
Insurance adviser: Willis
Environment consultant: Dfreire
Forecasting: Sinergia