ViaQuatro, the consortium led by CCR Brazil, reached financial close on its São Paulo Metro Line IV concession on 7 October 2008, with financing from the Inter-American Development Bank (IDB) and a club of seven banks. The deal is the first long-term project financing to close for a PPP concession in Brazil, and the first sign of progress from a market that has long promised, but rarely delivered.

The debt is split in two tranches, a $69.2 million, 15-year A loan from the IDB, and a $240 million, 12-year B loan from Banco Santander, SMBC, KfW, Banco Espirito Santo, BBVA as lead arrangers taking $37 million each, and Société Générale and WestLB as co-lead arrangers, each taking between $35 million and $30 million. The A loan was reduced from around $90 million and the B loan was increased as the latter was oversubscribed. The B loan was priced at just under 200bp, rising to 250bp over the life of the debt, and the A loan priced at 30bp higher than the B loan, rising at the same rate.

The project was not eligible for support from the Brazilian government's development bank, BNDES, because the trains for the project were manufactured outside of the country. Hyundai (South Korea), Roten (Italy) and Siemens (Germany) are constructing the metro trains. As with several other CCR-led projects for which the IDB is providing financing, such as ViaOeste and AutoBan, the sponsor is planning to refinance the debt in the domestic capital markets.

The 30-year PPP concession involves provision of rolling stock, trains and technical equipment, and the operation of a 12.8km metro line. CCR won the concession in August 2006, in a consortium that also included Montgomery Participações, RATP Développement and Benito Roggio Transporte. Mitsui came in as an equity participant in December 2007, brining the final line-up to CCR 58%, Montgomery 30%, Mitsui 10%, and RATP and Benito Roggio 1% each.

The state of São Paulo's government, under its civil works authority, is constructing the tunnels and train lines. The World Bank and JBIC provided the public sector with direct financing for the construction of the tunnels. The state performs the civil works before turning over the supply, operation and maintenance to ViaQuatro. The concessionaire will install the trains and the technical and signalling systems to begin operations, which include eight stations.

The second phase requires the concessionaire to open additional stations on the existing line and add between five and fifteen more trains, at the discretion of the State of São Paulo, at any time after the second year of commercial operations.

There are a number of variables in the concession structure that made arranging the financing more challenging. Firstly, the timing, the size and even the certainty of the second phase of the project are undetermined, but the state required the concessionaire to have committed financing for both phases.

In response to the two-phase obligation, the IDB offered a limited recourse, two-tranche A Loan, providing up to 25% of the total investment cost for each phase. The financing includes provision for a second A loan, of $59.5 million, and another B loan of undetermined size, for the expansion of the project, in a probable two-to-four year period. A second complicating factor is that the government is not obliged to complete the construction in its own identified timeframe, by the first quarter of 2010.

The debt allows for some flexibility in the construction phase. Although the two maturities are inclusive of the construction phase, at 12 and 15 years door-to-door, the interest-only grace period lasts as long as construction. Principal repayments on both tranches only begin once the asset is in operation. So, should the construction phase take two years, the principal repayments will be made over ten years for the B loan and 13 years for the A loan. However, the longer the construction takes, the larger the instalments, and the shorter the time to service the debt.
According to Fabio Russo, CCR's project finance manager, "The financing structure had to mirror the flexibility of the contract, we didn't want a mismatch of the conditions in the concession contract, the supply contracts and the financing."

John Graham, a senior investment officer at the IDB, notes that the construction, supply and operations contracts run back to back, and the financing had to align with these three factors, even if their start dates were subject to delay. The amortization schedule was calculated to allow for the maximum possible delay in construction. However, the loan agreements also allow for the possibility of early prepayments of principal if operations begin in 2010 as planned. He explains, "The effect was to give ViaQuatro the flexibility to get its operations up and running, while allowing the IDB right to require principal amortisation once the deal has the free cash."

The project's revenues will come from a combination of passenger fares and yearly availability payments of R$75 million ($44.1 million). The concession was awarded on the basis of a low bid for required availability payments. The concession also benefits from a minimum revenue guarantee and revenue-sharing threshold, protecting the concessionaire from low revenues, but providing the state with revenue sharing if use is higher than projections.

The line will provide predominantly commuter transit, running from the south-west of metropolitan São Paulo through to the north-east. The state and concessionaire expect that Line IV will add roughly 21% of capacity to the existing metro system. Benito Roggio Transportes and RATP will operate the system.

Brazil now has a PPP template, if a flawed and technically complex one. The government, for so long a shaky supporter of PPP structures, has put together a concession structure that reconciles lender demands and its own hazy planning processes. It plans to procure Line 5 of the metro in a similar fashion.

ViaQuatro
Status: Closed 7 October 2008
Size: $515 million (historic cost)
Location: São Paulo, Brazil
Description: 30-year concession of metro line
Awarding authority: State of São Paulo
Sponsors: CCR, Montgomery, Mitsui, Benito Roggio Transportes, RATP
Debt: $69.2 million A loan, $240 million B loan
Maturity: 12 years (B loan), 15 years (A loan)
Lenders: IDB, Banco Santander, SMBC, KfW, Banco Espirito Santo, BBVA, Société Générale, WestLB
Lender legal: Fulbright & Jaworski (international), Felsberg & Asociados (Brazil)
Sponsor legal: Mayer Brown (international), Machado, Meyer, Sendacz e Opice Advogados (Brazil)
Independent Engineer: Arup
Insurance adviser: Willis
Environment consultant: Dfreire