Cross Israel Section 18: Clever extension

The Derech Eretz Consortium (DEC) closed a $220 million senior and mezzanine financing with Bank Hapoalim for an extension to the Cross-Israel Highway Section 18, in June 2007. The challenge was combining the projects in terms of the same sponsor group, but keeping the concessions distinct enough to ensure comfort to the existing lenders.

The original Cross Israel deal is the first stage in a planned 300km highway running from North to South through the central region of the country. Since its completion in 2004, traffic on the Cross Israel Highway has continued to grow at 10%-plus per year and traffic levels now exceed the original forecasts.

The sponsors of the project are Aecon (25%), Africa-Israel Investments (37.5%) and Housing & Construction Holding Co. (the remainder). Their stakes in the builder and operator of the project, respectively, are different. At financial close, Aecon has sold its 25% stake in the joint venture building the extension to its partners, Danya Cebus and Solel Boneh, for $3.5 million.

For Section 18, Bank Hapoalim lead arranged a senior debt financing to SPC DEC 18 of a NIS denominated amount of $130 million. Many of the participants in the financing to DEC 18 are existing senior lenders to DEC (as part of the NIS denominated tranche). The dollar lenders to the existing project did not participate in the Section 18 financing.

The extension is an 18km section of the Cross-Israel highway running north from its current end near Hadera. The extension has been agreed as an addendum to the highway's existing concession agreement, between the Ministry of Transport and Derech Eretz.

The existing lenders on the Cross Israel project were hoping to annex Section 18 due to the additional traffic that it would bring to the existing project. However, the existing contracts did not entitle DEC to take on the Section 18 project as it would involve exposing the existing lenders to additional construction risk and would require DEC to incur additional senior debt.

The state's position was that any extension to the existing highway had to be awarded to DEC (rather than an affiliate) as otherwise, Israeli tender law would require the Section 18 project to be put out to competitive tender.
To satisfy all parties a compromise structure was reached: DEC entered into an addendum to the concession contract, whereby DEC was awarded the concession to develop Section 18, and a fully owned subsidiary (DEC 18) would be formed through which the financing would be organized.

The basic position agreed was that during the construction period, the rights of the existing lenders in relation to Section 18 were minimal since there was no risk of cross default. However, as soon as the operating period commences, in the event of any conflict between the two groups of lenders, it was almost always resolved in favour of the existing lenders.

Another innovative aspect of the Section 18 financing was the raising by DEC of third-party mezzanine financing. DEC raised a NIS denominated amount of $90 million through a tender to Israeli institutional investors – $50 million was earmarked for investment by DEC in the equity of DEC 18 to finance part of the construction of Section 18. The remaining amount of the mezzanine finance was used to pre-pay part of the existing sponsor subordinated loans. The mezzanine loans, structured with a repayment profile from 2011 until 2020, received a local rating of A3.

Cross Israel Section 18
Status: Financial close June 2007
Description: NIS denominated $220 million financing for Cross Israel highway extension
Sponsors: Aecon; Africa-Israel Investments; and Housing & Construction Holding Co
Lead arranger: Bank Hapoalim
Lender counsel: Herzog, Fox, Neeman
ProjectCo counsel: Tadmor & Co