The Autoridad del Canal de Panama (ACP), the authority that operates the Panama Canal, has raised $2.3 billion in senior unsecured debt from multilateral institutions for its expansion project. The ACP expects that the project's capital cost will be $5.25 billion, and around 57% of this will be funded from operating revenues at the canal.

The five-year construction period involves four stages, each with its own design-build contract. The construction of a third set of locks in the canal is the most challenging, and most expensive, of the stages. This contract will be awarded early in 2009, and four respondents to a request for proposals have been shortlisted to bid. Other works include dredging the canal entrances on the Atlantic and the Pacific; deepening and widening the existing navigation channels; and increasing the operational capacity at Gatun Lake, which provides water to the waterway.

Five multilateral lenders are providing the debt; the Japan Bank for International Cooperation (JBIC), the European Investment Bank (EIB), the Inter-American Development Bank (IDB), the International Finance Corporation (IFC), and Corporacion Andina de Fomento (CAF). All the tranches have the same structure, but their pricing varies. The debt will all have a 20-year maturity, with a ten-year interest-only grace period on payment; a period significantly longer than the construction phase.

JBIC is to provide $400 million in direct loans, with Mitsubishi UFJ Financial Group and Sumitomo Mitsui Financial Group providing the remaining $400 million under a co-financing arrangement. Japan is third-biggest user of the canal, following the US and China. The JBIC cofinancing is the only tranche to include commercial lenders. The EIB is providing $500 million, the IDB's piece is $400 million, and the IFC and CAF are each committing $300 million.
The average interest rate on the debt is around 5.5%, with margins on the tranches of between 50bp and 60bp over Libor at the lower end, and up to 140bp over Libor at the top end. The JBIC and EIB tranches carry the lower margins, as they do not have a strictly commercial comparator for determining their debt pricing.

Although the Panamanian government owns 100% of the ACP, the debt will be without recourse to the state, and will not benefit from any government guarantees. None of the ACP's assets, including the canal and the surrounding property, can be used as collateral. The Authority will, however, continue to make payments to the government of all excess cash-flow, after operations and maintenance costs, debt service, and reserve payments. Under the base case, the project will have a debt service coverage ratio of between 7.5x and 16x. The multilateral lenders are expected to stipulate a minimum DSCR of 2x.

According to Moody's rating of the authority, 30% of the total debt is reserved for contingencies, such as cost increases and overruns, or an unexpected inflation increase. Moody's has given the debt a provisional rating of A2, piercing Panama's A3 country ceiling, due to the ACP's eight-year history of operating autonomously from the government. Though the investors cannot appeal to the government in the event of default, the ACP does not have any other outstanding debt, and its coverage ratios are very robust.

Moody's also notes that the political implications of borrowing from multilaterals minimise the possibility of default. The relationships between the lenders, the borrower, and the country are long established. The IDB and JBIC, in particular, have been involved since the early stages of planning for the expansion, and over the last twenty years have also contributed to social and economic support programmes in the country, though not through their private sector arms.

The lenders feel that, even if the construction was abandoned, the revenues generated at the two existing locks are sufficient to service the debt. All revenues are paid by the canal users in advance, and all of its cash-flow is dollar denominated and held offshore, which is partly why the ACP's rating is higher than that of the sovereign. Though the depressed global economy is resulting in decreased freight trade, the canal is still benefiting from use by countries, notably in Asia, and companies that have not been hit so hard. And the two existing locks are not sufficient to meet this demand.

The concentration of multilateral debt, however, is indicative of the result of the credit crises on the shipping and transportation sectors, and banks' nervousness about them. According to a number of the lenders, these types of multilateral club deals may become increasingly common in emerging markets transportation projects, for sovereign and non-sovereign, private and public deals. The multilaterals are concerned that these projects may be hampered by commercial banks' commitment constraints, and the great reduction, even cessation, in lending which could continue over the coming year.

The IDB, for example, is currently arranging a financing for CCR's RodoAnel highway concession, and though it is in negotiations with a number of commercial lenders to provide a B loan, CAF is also poised to step in with an A loan level should the banks not be able to fund or reach the expected commitment level. The result of the increased demand for multilateral lending is that multilaterals will have to be more selective in choosing projects, and expect to favour projects with a clearer economic and social development focus, particularly in the renewables sector.

In the case of the Canal deal, despite the rating and the robust revenues generated by the asset, very few commercial banks, particularly European and US institutions, could commit to large facilities given the maturity, and the length of the grace period required. While commercial banks find government, or quasi-government, credits and multilateral cover very desirable, they will shy away from aggressive structures even with cover.

Autoridad del Canal de Panama
Status: In documentation, due to close December
Size: $5.25 billion
Location: Panama
Description: Expansion of Panama Canal
Sponsor: Autoridad del Canal de Panama (ACP)
Debt: $2.3 billion
Equity: $2.95 billion
Maturity: 20 years
Lenders: JBIC, EIB, IDB, IFC, CAF, BTM UFJ, SMBC
Financial adviser: Mizuho Corporate Bank
Lender legal: Clifford Chance (international); Morgan & Morgan (local)
Borrower legal: Shearman & Sterling (financial); Mayer Brown (construction)