With bank confidence in Libor/Euribor rates at an all time low, lenders on the Eu841 million ($1.07 billion) Liefkenshoek rail tunnel PPP in Belgium have structured a first into the financial engineering – the state-owned rail infrastructure procuring agency Infrabel is taking on market disruption risk (funding cost risk) during the four year construction period thus guaranteeing liquidity for the deal.

Arguably, some of the problems with Libor rates are of banks own making – according to some sources the data being provided by lenders for calculating rates does not in all cases reflect the true cost of funds to lenders. But irrespective of where the fault lies, market disruption clauses are a growing problem in the project market. With Infrabel shouldering the risk, lenders and sponsors on the Liefkenshoek deal have lending rate certainty for four years and no prospect of pricing renegotiation during construction or worse, the banks walking away from the deal.

The risk transference does come with caveats: market disruption has to be a proven disturbance in the global financial markets and the average cost of funding to all lenders must be higher than Euribor. But the innovation has still gone some way to obtaining competitive debt pricing in the toughest of lending markets and for what is Belgium's highest volume single PPP to date.

Lead arranged by ING (also financial advisor), Fortis, BayernLB, Societe Generale, Santander and BNG, the Eu714 million financing features Eu313 million of 35 year EIB project debt.

The EIB debt is split between a Eu200 million direct loan and a Eu113 million tranche guaranteed at 105% by the commercial banks. The remainder of the debt is also provided by the commercial banks – in effect a total Eu514 million, which also includes a five-year Eu81 million equity bridge, is split between the six leads on a club basis.

The commercial debt is rumoured to be priced at around 120bp over Euribor, although initial pricing was said to be a low as 70bp which prompted one of the original banks in line for the deal, HBOS, to pull out.

Upfront fees are around 200bp and although tenor on the debt is 35 years, the deal is structured with a margin jump of around 100bp in year 15 and a concurrent full cash sweep, thereby necessitating a refinancing.

Sponsored by Locorail Consortium – a joint venture between BAM PPP Investments (50%), CFE NV (25%) and Vinci Concessions (25%) - the 42.2 year DBFM concession (including 4.2 years construction) is for a 16.2km rail link. The scheme is a key part of Infrabel's programme to expand rail access to the Port of Antwerp, to which it has already committed Eu100 million to provide additional capacity between 2007 and 2020.

The project includes a new 6km tunnel under the River Schelde and the Port of Antwerp, the reopening of an existing 2km rail tunnel – the Beveren Tunnel – which was built 20-30 years ago but never used, 4.8km of embankment and 4.2 km of open and covered trench. Engineering and construction will be handled by the THV LocoBouw consortium, which includes MBG, Vinci Construction Grands Projets, CEI-De Meyer and Wayss & Freytag.

The concession structure differs from Infrabel's last major rail PPP procurement – the Eu370 million 40 year Diabolo PPP closed last year (for more details search 'diabolo'). While Diabolo featured elements of traffic risk, Liefkenshoek is purely availability payment based and also includes a construction subsidy of Eu107 million from the Flemish regional government.

Furthermore, those availability payments – an annual Eu50 million fee paid by Infrabel in quarterly instalments over the 38 year operational life of the concession – are only linked to the civil works and some electromechanical installations (firefighting systems for example). Infrabel remains responsible for track, signalling, railway systems and power supply, which will be installed at a further cost of Eu75 million.

With construction starting this month, civil engineering is due to be completed by mid-2013. Infrabel will install the tracks, signalling and overhead electrification wiring in several stages during 2012-14. Testing of the completed line should begin in spring of 2014, allowing commercial services to start in the middle of that year.

Liefkenshoek Rail
Status: Financial close 6 November 2008
Description: Eu841 million rail PPP at the Port of Antwerp
Sponsors: BAM PPP Investments; CFE NV; Vinci Concessions
Financial advisory: ING
Lead arrangers: ING; Fortis; BayernLB; SG; Santander; BNG
Multilateral support: EIB
Sponsor legal counsel: Freshfields Bruckhaus Deringer
Sponsor tax and accounting: Tiberghien and Mazars
Lender legal counsel: Clifford Chance
Lender technical advisor: Mott McDonald
Lender insurance advisor: AON