In the past few months, Portuguese company Brisa has closed two major international roads concessions, the Douro Litoral in its domestic market, and the Northwest Parkway in Denver, Colorado. Its emergence as an international private operator highlights the distance it has moved from its publicly-owned origins. Brisa was established in Portugal in 1972 as a state-owned road operator. It owns a concession to operate 1,100km of motorways, across Portugal, that runs until 2032. In 1997 the company was floated on the Lisbon stock exchange.

In the 10 years since the privatisation, Brisa's head of finance, João Pereira de Vasconcelos, notes that the company provided the highest value to shareholders on the Lisbon stock exchange in terms of stock price appreciation and dividends. But this growth has led to a change in Brisa's credit profile.

Because of the increased amount of project debt that Brisa has closed, Standard & Poor's downgraded the company's overall credit rating from A to A- in November 2007, and again to BBB+ in January 2008. The rating agency described the downgrade as being due to its "concerns regarding the company adopting a more aggressive investment strategy and financial policies."

The downgrades were limited, and Brisa's rating is still level with most of its peers, but the move highlighted Brisa's shift in financing strategy. While the company was still state-owned, it used recourse debt to finance its projects, with the European Investment Bank (EIB) playing a prominent role. Ten of the eleven roads included EIB funding, and the rest of the capital was raised from company cash-flow, and diversified corporate sources, including bank loans. Today, three-quarters of Brisa's debt remains consolidated at the corporate level, of which Eu1.1 billion ($1.72 billion) is outstanding corporate bond debt, with just a quarter at the project finance level.

The EIB still plays a significant role in Brisa's deals, usually up to 50% of project's eligible capital expenditure, but now provides financing on a non-recourse basis. The EIB has also been present on both the Douro Litoral (for which it provided a Eu350 million loan) and the Litoral Central (Eu264 million) deals. Vasconcelos says that Brisa will continue to use EIB debt, because of its competitive terms and long maturities, but that the company is no longer dependent on the EIB, "It's advantageous, but not necessary," he says.

Since 1997, Brisa has put in bids for all three real toll roads concessions that were issued in Portugal, and won two of them; the Litoral Centro toll road concession which was awarded in 2001, and closed in 2004, and the Eu1.2 billion Douro Litoral which closed in January 2008. It lost the middle bid, for the Grando Litoral in 2006, to MOTA, with which it is now working on a bid for Lisbon airport.

Brisa steered clear of the SCUT shadow toll roads because it was in the process of privatisation, and because it did not yet have independent management, the state decided that Brisa should not bid. The ban spared Brisa much of the hard work involved with restructuring the SCUTs, which consumed huge amounts of government, sponsor and lender attention.

Global expansion

Vasconcelos explains that the company is now looking for projects in the US, Latin America and Eastern Europe. In December 2007, Brisa also closed its first international project financing, for the Northwest Parkway 99-year concession in Denver, Colorado.

"Northwest Parkway provided Brisa with the possibility to enter the US road infrastructure market in a fast-growing urban area, with opportunities for expansion. The US infrastructure market is huge, and the politicians recognise the need for investment," says Vasconcelos. "The deal was a good entrance to the US market, which gave us a better understanding, with an ideal-sized project."

Brisa acquired an 18% stake in Brazilian roads concession company CCR in 2001, for which it paid Eu180 million. That stake is now valued at Eu850 million. Vasconcelos explains that, "we are working through CCR in Latin America. It is an independent company, with four main shareholders, including Brisa, and three strong local Brazilian companies." CCR also has a 10% stake in the Northwest Parkway.

Indeed, CCR submitted the preferred bid for the São Paulo Rodoanel Oeste ring road concession in March 2008, and is expected to be awarded the project imminently. Its bid was based on toll rates, which at R$1.16 ($0.67) is significantly below the R$3 ($1.76) maximum toll outlined in the bidding rules.

Of the third identified region, Eastern Europe, Vasconcelos says, "There aren't as many opportunities as we would like to see yet, though we are enthusiastic about a greenfield motorway project coming up in Romania." Pursuing opportunities in Eastern Europe would also allow Brisa to exploit its existing relationships with the EIB, which is still a major force in the region.

And the region has some huge opportunities, "Eastern Europe offers convergence potential, that is to say, decreasing interest rates coupled with above average economic growth. We would like to make good investments in convergence regions. There is more risk there than in occidental Europe, but where there is higher risk, there is also greater return potential. In Western Europe, we feel there is not a lot of value to be extracted anymore."

It is also expanding in other regions with convergence qualities, having teamed with Babcock & Brown (each with a with 40% stake) and a local partner, to prepare a bid for the Turkey highways concessions, collectively valued at Eu4 billion, which are also expected to be offered for tender 2008.

In a consortium with FCC and Gazprom, it has also prequalified for two 30-year motorway concessions in Russia to be awarded in 2008, one between Moscow and St Petersburg, valued at Eu1.5 billion, and the other between Moscow and Minsk.

In more developed project finance regions, Brisa is also working with Babcock & Brown (again, each with a 40% stake) and some local partners in a consortium for the Brisbane airport link project in Australia, for which the bids have been submitted, and an award is due later in the year.

The long and short of it

According to Vasconcelos, Brisa does not operate from a preferred project financing template. "The way the project will be financed doesn't change the way we put the bid and the deal together." Brisa's two large deals in the last year were both project financed, using bank debt, but were very differently structured.

The structure of the debt for Douro Litoral differs decidedly from its 2007 counterpart deal in Colorado. The $686 million Northwest Parkway deal involved a 10-year, $459 million financing which was underwritten by RBS, with the clear motivation to fund now, then refinance within 10 years when it would be more attractive to do so; it was essentially a mini-perm structure. (For more details on this financing, search "Northwest Parkway").

Vasconcelos explains that, although the project was financed with bank debt, the project was rated, "We had originally intended to finance it with monoline-wrapped bond debt. When the subprime crashes hit, we kept the investment-grade rating, as it was easier to secure a bank financing with the rating. What was crucial for us was to get non-recourse financing before year-end, to get the deal off our balance sheet, and to no longer be dependent on the financial markets." He also adds that though agencies consolidate the Northwest Parkway debt at the Brisa level, as far as Brisa is concerned all the financial risk is off its balance sheet.
The mini-perm financing itself replaced a $250 million bridge loan, also provided by RBS, which allowed the project to close with the Northwest Parkway Authority. The payment to the Parkway authority, which was made on 21 November to meet a deadline from the concession agreement, extinguished the road's existing distressed bond debt.

The mini-perm deal had to close by the end of 2007, because Brisa needed to tidy up some of its short-term corporate debt obligations. In December it repaid Eu400 million of its outstanding short-term debt with the same sum raised in long-term debt through a securitisation of domestic receiveables.

The financing for Douro Litoral, which closed the following year, featured a Eu350 million loan from the EIB, and Eu490 million as a 27-year syndicated loan provided by four banks, Millenium BCP, CaixaBI, RBS and Santander. The debt is now in syndication and is expected to close in April, though the timing may depend on the current difficulties in syndication markets. The arrangers are offering tickets of Eu120 million, at 70bp over Libor.

Douro Litoral is a ring road around Portugal's second largest city, Oporto (Porto). "It has heavy urban and commuter traffic, and links to three of the motorways in the original Brisa network," says Vasconcelos, "which has obvious geographical advantages, and synergies for us." The 120km route involves some degree of greenfield construction and the operation of some existing roads. The Eu1.2 billion project will feature Eu1 billion in capital expenditure.
In the Portuguese roads market, Vasconcelos sees the project as one of few remaining large opportunities, but with "the largest growth opportunity. All the other new Portuguese concessions are smaller, so this was the Last of the Mohicans."

Vasconcelos believes that there are benefits to both styles; "The kind of financing for Douro Litoral provides the shareholders with long-term certainty of funding for the project."
Though RBS was a player in both deals, Vasconcelos says "it was not one of our relationship banks, but CaixaBI and Santander are, and have been, our relationship banks. We are not market-specific in choosing who to work with, but we have noticed that most of the same players are in all regions in the areas where the road infrastructure project finance market is developed, both sponsors and banks. The sector is global."

An interesting feature on the Douro Litoral deal is that it has a variable end-date, between 2026 and 2034. Once the concessionaire has reached a certain level of return, expressed in net present value terms, it will transfer the asset back to the state. If traffic outperforms expectations, the road will be returned on the earlier date, but if not, it will continue operation until 2034. Douro Litoral is the first time the variable rate concession has appeared in Europe, though it made its debut on Chile's Rutas del Pacifico deal in 2002, However, in that case, the variability was government-mandated rather than sponsor-initiated. "We included it because we look for new ways to differentiate ourselves from the competition," says Vasconcelos.

Ratings and risk

Though the turbulence in the credit market has had some impact on Brisa and its projects, Vasconcelos remains pragmatic, "Obviously the markets are negative at the moment, but crises do not last forever."

On the upside, he views the squeeze on credit as potentially lucrative in the longer-term. "We have seen that, as a result of the financial crisis, banks are demanding more protection on the models, using flex clauses on margins and fees, a greater amount of risk transfer, and higher equity commitments. Banks want less credit risk, and Brisa is willing to accept those risks, but we require higher rates of return from our projects. It's a good opportunity for companies willing to submit balanced bids in this environment."

Though the Northwest Parkway deal was executed under trying circumstances, and its terms reflect that, Vasconcelos sees the benefits to the sponsor of shorter-term financings in this kind of market. "Sponsors also have the additional value of bidding for projects in this market, through the value of refinancing deals closed in the crisis period. If we put together deals now, when the market turns we will enhance return on equity. Of course, we are cautious in these difficult times, but we are aware that we can create that additional value for shareholders some years from now."

However, he also points out that, "we are comfortable with our current rate of return on these deals. A refinancing may improve the return, but we don't close deals with this in mind. It is never a condition of the deal." He also notes that, "Although for sellers, deals are not as good as they have been, sponsors can be more demanding, looking for a greater return for what they are bringing to the table."

That said, due to its increasingly aggressive expansion policies, and the success of its existing projects, Brisa suffered an S&P downgrade and was put on credit watch by Moody's, which views the increased debt for the new projects as adversely affecting the company's risk.

Vasconcelos shrugs off the agency concerns. He says that "the downgrade has not had a big impact on out liquidity situation, as we have always maintained a conservative liquidity policy. All our debt is long-term, with similarly long-term commitments from banks. All of our current projects are fully financed, and when we put together a deal we ensure that we make enough liquidity available from the outset. In that respect we are cash-rich."

Standard & Poor's concurs, describing Brisa's liquidity as "adequate", and considers that its "debt repayment in the short and medium term is moderate". However, Vasconcelos remains circumspect on the impact of the downgrade on raising debt on future projects, and when coupled with the turbulent credit markets, Brisa may have to pay up to maintain its expansive posture.

Since the markets became unsteady, Vasconcelos says "we've noticed that rating agencies have become even more conservative, too prudent." He believes that the rating agencies' methodologies do not reflect the benefits of project finance to a company's risk profile.

"One of the greatest challenges we face as a sponsor is that the rating agencies don't give us credit for non-recourse financings," he says. According to Vasconcelos, Brisa consolidates a proportionate share of the debt of subsidiaries in which it holds more than 50%, while the agencies consolidate all the debt of project companies in which it holds a significant stake, even those it does not control. "We should not be liable for all the risk of a project when we do not fully control it, and we are not getting enough credit for the protective measures we've put in overall. We think that the most important part of putting project deals together is risk mitigation, and we go to great lengths for it, paying a significant financial premium in doing so."

When preparing to pursue a growth strategy, he explains that the company "adopted a policy of risk mitigation to bid for more projects than we could hold on our corporate balance sheet." Its risk mitigation is not just a matter of non-recourse debt, but also includes strategic partnerships and local involvement.

He explains, "We like to be the largest shareholder in a project, but we do not want to take more that 50%." He elaborates that "if you have less than 50%, you are reducing your exposure to the project's risks. However, we always prefer to be at least as big as the biggest shareholder, so we would take 40% in a project, but not if there were only one other partner." If Brisa owns more than 50% of a project, it consolidates all of its debt on balance sheet. If less, it does not.

However, Vasconcelos maintains that the policy is not just down to clever accounting, but by creating such partnerships, Brisa is increasing its chances of winning bids in new regions. He continues, "We like to bring on board strong partners, namely local partners, which know the domestic market, and have a strong record for reliability, thus mitigating the risks associated with regions where we do not have previous presence or experience."

Vasconcelos believes that, "Brisa's challenge is to be able to convince both investors and rating agencies alike that these three risk-mitigation measures, most importantly the first, debt without recourse to Brisa, should be recognised. The project finance debt should not be consolidated into the total exposure on our corporate balance sheet. To do so is to question the virtues of the well-recognised and tested project finance industry."

Home again

In its local market, Brisa is maintaining a dominant position. Its Portuguese assets and concessions include the original network of 11 motorways. It also has a 50% stake in Atlantico, a project company which holds a concession for a 170km toll road; a 70% stake in the 92km of Brisal motorways, and 55% of the 126km Douro Litoral.

Portugal is due to issue a further seven concessions in 2008, totaling 600km of tolled highway. While these will be a little smaller than the earlier wave, Brisa is planning to submit bids for all of them, with the first bids in for the Douro Interior on 2 April 2008.

Brisa is also expanding into other sectors within its domestic market, including the new Lisbon airport, which is expected to come up for tender in the second quarter of 2008. It has formed a consortium in which it has a 24% stake, with Mota (24%), Sacyr (15%), and three banks, Banco Espirito Santo, CaixaBI, and Millennium BCP, each with a 9% stake. The remaining portion will be taken by small local construction companies.

The company is also preparing to bid for the Portuguese high-speed train PPP when it is issued, but it will only involve building and financing the project, and not its operation.

Vasconcelos feels that "Brisa now has a comprehensive understanding of the roads market internationally, and that the company is now ready to look to diversify in other transportation and infrastructure sectors within the domestic market."

Though many of the best-laid plans have been scuppered by the credit crunch, Brisa's long-term outlook, and short-term opportunism, may give it a head-start over other operators. However, convincing the debt markets of the virtues of non-recourse project financing, and regaining investor confidence in its credit capacity will be a substantial challenge.