Lekki-Epe Expressway: The missing link

Like many emerging market deals, the Lekki-Epe Expressway financing is a testament to perseverance. But unlike many emerging market deals, Lekki-Epe is a vast leap from very simplistic PPP to a sophisticated concession structure and financing.

The deal is not completely unprecedented. Murtala Muhammed Airport Terminal 2 (MMA2 – the domestic terminal in Lagos) was awarded in 2003 as a 35-year BOT to Bi-Courtney. But that deal was financed via a N20 billion ($150 million) corporate, rather than project, facility from Oceanic Bank, Zenith Bank, GT Bank, First Bank, First City Monument Bank and Access Bank.

Conversely, Lekki-Epe Expressway is backed by true project debt and sets a mature structural blueprint for a new Nigerian infrastructure market. Not only is it West Africa's first real PPP toll road, it is also the first 15-year tenured local-currency financing in Nigeria and features the longest cross-currency swap in Nigeria to date.

The desire to get the project done also spurred the Lagos State Government's review and redesign of the legal and regulatory framework (a process that was initiated and driven by the sponsors in the negotiations over the Lekki concession contract) and culminated with the gazetting, in February 2005, of the "State Roads, Bridges & Highways Infrastructure (Private Sector Participation) Development Board Act."

Despite the convoluted name, the legislation is a replicable framework for road concessions and was to significantly influence the new concession law later developed by the Federal Government.

The final concession agreement provides typical protection to the concessionaire including the provision of delay and compensation events, and senior debt obligations are honoured under all termination events.

Sponsored by Lekki Concession Company (LCC) – an ARM Group special purpose company with Larue Project Ltd and Macquarie's African Infrastructure Investment Fund (AIIF) as minority investors – the 30-year concession is part of the wider Lagos Infrastructure Project and involves upgrading and creating new road along the first 49.4km of the Lekki-Epe Expressway (Phase I) and developing the first 20km of Lagos' Coastal Road with an option to also do the Southern Bypass (Phase II).

The Lekki Peninsula forms a narrow strip of land extending eastwards from Victoria Island to Olokola State. Given that it is not separated from the islands by any geographical obstacles such as the Lagos Lagoon that separates the mainland from Lagos and Victoria Islands, the area is ideally located to serve as a natural hinterland for the expansion of Lagos and, as such, has experienced rapid growth in recent years.

However, the city of Lagos has not been able to fund the investment in infrastructure required by the fast-growing urban economy, and traffic congestion and long travel times have reached gridlock levels.

Despite the urgency the deal took five years to close and hurdled changes of Nigerian government at state and federal level, reform of the Nigerian banking system, construction cost escalations and the onset of the global credit crunch.

The financing started life as a miniperm-style structure (5+5+5 years) with FMO providing a liquidity guarantee. But because the sponsor was uncomfortable with the refinancing risk, the arrangers were forced to structure a more sophisticated deal with enough lender comfort that local banks would go to a 12-year tenor – unprecedented for a Nigerian project financing – and with no Nigerian government minimum revenue guarantee for the sponsor.

Priced over the yield to maturity on a 10-year Nigerian government fixed-rate bond, the full financial package comprises a $43 million 20-year mezzanine loan from Lagos State, an $85 million 15-year loan from the African Development Bank (AfDB); a $78 million 12-year local tranche from First Bank, UBA, Zenith Bank, Diamond Bank and Fidelity Bank, a 15-year international bank loan from Standard Bank/Stanbic and a $30 million standby facility from First Bank and UBA.

All lending is in Naira – and hence comes with a natural hedge – apart from the AfDB tranche, which features a long term naira/dollar currency swap.

The lenders can take comfort from a strong concession package. The deal benefits from toll revenues charged on the existing road during the three-year construction period – forecast to be around N11 billion.

There are also various mechanisms designed to protect lenders and investors such as standby debt and equity; a minimum 15-year tail on the debt; the right to adjust tolls periodically, subject to inflation-linked maxims; compensation events that give the concessionaire the right to raise tolls or request additional support from Lagos State; a debt service reserve account; a maintenance reserve account; and ultimately, a government guarantee issued by the Federal Government of Nigeria that fully covers lenders in the event of termination of the concession agreement.

Lekki-Epe Expressway
Status: Financial close October 2008
Description: First real Nigerian toll road PPP financing
Sponsors: Asset and Resource Management Company Limited (ARM); Larue Project Limited; Africa Infrastructure Investment Fund
Total project cost: N50 billion
Total debt: N28 billion
Lead arrangers: Standard Bank Plc (MLA for international tranche)
First Bank of Nigeria (MLA for local tranche); United Bank for Africa (MLA for local tranche)
Participants: African Development Bank; Zenith Bank; First Inland Bank; Diamond Bank; Fidelity Bank
Financial advisers: Rand Merchant Bank; Standard Bank
Sponsor legal counsel: Aluko & Oyebode; Trinity International
Lender legal counsel: G. Elias & Co; Orrick Herrington & Sutcliffe
EPC contractor: Hitech Construction