Tunel do Marao: Matching the revenue mix

The Tunel do Marao project financing was both a first and last – the first project to use the European Union's Loan Guarantee for TENS Transport (LGTT) initiative; the first Portuguese road to reach financial close under the government's new availability and service payments concession structure, and the last roads project to be directly awarded by the Portuguese state (all projects are now sub-concessions of state-owned Estradas de Portugal – EDP).

The 30-year DBFOM concession – sponsored by Somague Itinere (53%), MSF Concessoes (35%), MSF Empreiteiros (10%), Somague Engenharia (1%) and Itinere Infraestructuras (1%) – is for an increase in lanes on the A4/IP4 toll road linking Amarante to Vila Real in northern Portugal with a total length of 29.8km, and the maintenance of a section of road between No de Geraldes and No de Padronelo, where no tolls will be collected.

The main technical challenge on the Eu483.5 million project is the construction of Portugal's longest tunnel – two 5.7km two-lane tunnels with 13 interconnections between the two galleries – and all in just 44 months. The project also includes 13 viaducts (of 4km total length), 16 grade separations, two animal crossings, one service area and a road service and maintenance area.

Designed by financial adviser CaixaBI and the sponsors, the financing is a bespoke package that manages a wide revenue mix, overcomes differences between bank and sponsor ramp-up expectations and makes the most of EIB participation.
The project is financed on an 85:15 debt-to-equity ratio with a minimum and average ADSCR of 1.15x and 1.2x respectively, and an LLCR of 1.0x if traffic falls below 30%.

The debt facilities comprise a 27-year Eu119.1 million ($155 million) A loan priced at 110bp to 130bp and with traffic risk; a 27-year Eu171.4 million B tranche priced at 85bp and to be fully repaid by availability payments; a 27-year C facility of up to Eu65 million priced at 110bp to 130bp designed to be repaid if traffic is above base case after ramp-up or by shareholders' standby funds if it is not (thus bridging the different ramp-up expectations of the sponsors and lenders); a Eu60 million equity bridge and an Eu8 million concession guarantee facility.

The sponsors put in Eu140 million of equity of which Eu77 million is standby.

The senior debt was lead arranged by Bank of Scotland, Caixa Geral de Depósitos, Fortis, La Caixa, Royal Bank of Scotland and WestLB on a club basis. Marao was the first deal to reintroduce the bank club to Portugal, partly because the lead arrangers on the Douro Litoral were struggling to syndicate at the time. And deals since Marao have not featured underwriting and are unlikely to do so for some time given the harsh financial climate.

The European Investment Bank (EIB) played a significant role in the project – as both multilateral lender and innovator. The EIB's LGTT facility is a new guarantee instrument designed to back Trans-European Transport projects. The LGTT is expected to accelerate private sector investment in European transport networks and was jointly developed by the European Commission and the EIB.

The LGTT was launched in January 2008 and has a maximum ceiling of Eu200 million per project. However the European Commission and the EIB have each made an initial commitment of Eu500 million to the scheme so it is likely to appear regularly on future projects in small amounts.

The LGTT covers the risk of unexpected reductions in project traffic revenue during the initial period of operation. Repayment of the LGTT credit (if drawn) is subordinated to the prior repayment of the senior facilities and as a result the project's financial viability is enhanced.

Although the LGTT is small on Marao – only Eu20 million – it gives lenders an added cushion and can be called if traffic falls 20% below the lenders' base case, thereby realigning the project ratio levels to the real traffic level. The LGTT is repaid via a cash sweep on cash available after senior debt service.

The EIB also put up a Eu180 million loan pari passu with the commercial lenders for the project – the first time the EIB has assumed project risk on a Portuguese infrastructure project.

The combination of the EIB package, the matching of different tranches of debt to different revenue streams and the clever C facility, which bridges sponsor and lender ramp-up expectations, gave the sponsors and edge in a difficult lending market.

Given the technical risk on Marao, a club deal without those innovations may not have been enough to get it financed. Many of the international banks in the deal are no longer actively pursuing Iberian projects, but for those that replace them once the bank market returns to a semblance of stability, Marao is a good template.

Tunel do Marao
Status: Financial close 30 May 2008
Description: Technically challenging and financially innovative road and tunnel infrastructure financing.
Sponsors: Somague Itinere-Concessoes de Infraestructuras; MSF Concessoes-SGPS
Total project cost: Eu483.5 million
Total debt: Eu423.5 million
Lead arrangers: Bank of Scotland; Caixa Geral de Depósitos; Fortis; La Caixa; Royal Bank of Scotland; WestLB; EIB
Financial adviser: CaixaBI
Financial adviser to government: Banco Efisa; PwC
Sponsor legal counsel: Linklaters
Lender legal counsel: Morais Leitao Galvao Teles Soares da Silva & Asociados
EIB legal counsel: Vieira de Almeida & Associados
Consultants: Faber Maunsell (technical); Aon (insurance); KPMG (model auditor)
EPC contractors: Somague Construcoes; MSF