Liefkenshoek: Swept up

The financing for the Liefkenshoek rail concession involves the public sector customer assuming funding cost risk, and the sponsor accepting a cash sweep halfway through the debt's life. The deal thus falls firmly into the post-crunch category, but involves the most innovative and comprehensive response to the realities of the current PPP market yet devised.

Sponsors BAM PPP Investments (50%), Vinci Concessions (25%) and CFE (of which Vinci has control, (25%)) not only brought an Eu841 million ($1.07 billion) deal to market in November 2008, but also persuaded the European Investment Bank (EIB) to overcome its traditional aversion to cash sweeps as a way of increasing commercial lender confidence in the concession.

Such a suite of enhancements might look like over-kill for an availability-based concession. But they serve to highlight the steps necessary to restore confidence in the battered infrastructure finance market. Sponsors and government deserve credit for responding to market conditions with such alacrity.

Liefkenshoek is a 42.2-year rail tunnel construction and maintenance contract, and the largest PPP project in Belgium to date. The design-build-finance-maintain (DBFM) concession involves a mixture of new work and brownfield construction. The winning consortium has to build a double-bored 5.8km tunnel running under the River Schelde and the Port of Antwerp, as well as reopen the 1.2km Beveren rail tunnel, unused but over 20 years old. In addition, the winner will build 4.8km of rail zone and 4.4 km of open and covered trench.

The concessionaire will receive a yearly availability payment of Eu50 million, a payment that does not include traffic risk or rail maintenance responsibilities. The key to keeping this payment low was to extend the tenor as far as possible, even in the worst market conditions. Pricing and debt terms were, in the circumstances, secondary concerns.

Getting the deal to close involved a three-sided bargain. Banks agreed to provide debt with a nominal tenor of 35 years, at a time when many would prefer to lend for less than 10 years, if at all, although they received fees that are believed to be as high as 200bp. In return, the Belgian procurement agency Infrabel agreed to shoulder the risk that banks' funding costs might increase sharply during the construction period.

The most immediate effect of the collapse of Lehman Brothers was a spike in interbank rates and a collapse of confidence in such rates. Without this confidence a competitive syndicated loan market cannot operate, and sponsors find it difficult to offer their government clients competitive availability payments. Several solutions have been offered to the disconnect between the rates that are reported and banks' funding costs, including complex debt pricing formulas.

In exchange for this rate support, Infrabel will receive 50% of the gains from any refinancing that takes place before year 15. The sponsors consented to a cash sweep on the debt if the project cannot be refinanced in year 15, as well as an increase in debt margins in year 15, from 120bp over Euribor to nearer 220bp. They will retain the benefit of any refinancing that takes place during the sweep period.

The sponsors and their financial adviser were fortunate not only that they could bring in the EIB as a lender, but also that the EIB agreed to match the banks' terms. The EIB has become increasingly comfortable with mini-perms, but still looks warily at cash sweep mechanisms. By presenting the refinancing as probable, rather than possible, and the debt as closer to a mini-perm, as well as noting the EIB's reluctance to lend on less preferential terms than the banks, the EIB was persuaded to bend its policy.

The lead arrangers on the debt were ING, which also served as financial adviser, Fortis, which was agent bank, BayernLB, Société Générale, Santander and BNG. The total debt was Eu714 million, of which the commercial lenders are providing Eu313 million directly, putting up Eu119 million to guarantee part of the EIB's debt during construction, and also providing an Eu82 million equity bridge loan. The EIB provided a Eu200 million loan on the same terms as the commercial lenders and a Eu113 million loan that benefits from the commercial banks' guarantee.

Together with a Eu107 million grant from the Flemish regional government, channelled through Infrabel, the Eu626 million in senior debt, Eu82 million equity bridge and the first availability payment of Eu26 million meet the project's Eu841 million total cost, of which capital expenditure is Eu682 million. The financing closed on 5 November 2008, 2.5 years after the tender for the tunnel was launched.

According to Stéphane Noirie, senior manager for international projects in Vinci's structured finance department, Liefkenshoek benefited from the experience of the closing of the financing of Coentunnel, which, like Liefkenshoek, was a DBFM concession that involved some tunnel work. Coentunnel, located in the Netherlands, closed in June 2008, and also featured the EIB as a lender and a (slightly smaller) club.

There is as yet little consensus about whether Liefkenshoek's represents a benchmark for PPP procurement or a one-off necessary step. Certainly the EIB will pause before offering up similar terms. Several sponsors might chafe under the strictures of both hard miniperms, those where a default is declared if there is no refinancing at maturity, and soft miniperms, where, as on Liefkenshoek, following the soft maturity banks will hoard all the concession's cash. That said, with the cash sweep 15 years away it is very unlikely Liefkenshoek will not be able to refinance in time.

Locorail NV
Status: Closed 5 November 2008
Size: Eu841 million
Location: Antwerp, Belgium
Description: Eu841 million rail PPP at the Port of Antwerp
Sponsors: BAM PPP Investments; CFE NV; Vinci Concessions
Lead arrangers: ING; Fortis; BayernLB; SG; Santander; BNG
Multilateral support: EIB
Awarding authority: Infrabel
Financial adviser to Infrabel: Deloitte
Legal adviser to Infrabel: Allen & Overy
Financial adviser: ING
Sponsor legal counsel: Freshfields Bruckhaus Deringer
Sponsor tax and accounting: Tiberghien and Mazars
Lender legal counsel: Clifford Chance
Lender technical adviser: Mott McDonald
Lender insurance adviser: AON
EPC contractors: Vinci Construction, MBG (an affiliate of CFE), Wayss & Freytag, CEI de Meyer