The first European transport PPP since last year's E18 Grimstad-Kristiansand road project in Norway to use wrapped bank debt – the Eu573 million Millau Viaduct refinancing reached financial close on 13 July.

The project's sponsor, Eiffage, will receive a dividend from the refinancing after selling a 49% stake in the holding company Verdun Participation 2 (VP2), set up to structure the deal as an acquisition financing, to public infrastructure fund Caisse de Depots et Consignations (CDC) last year.

Importantly for the commercial banks arranging the debt – Depfa and Dexia – the monoline wrap enables them to minimise the risk weighting on their commitments. The refinancing comprises two tranches, a Eu430 million 44-year commercial loan arranged by Depfa and Dexia, and a Eu143 million 30-year loan from the EIB. Both facilities are French CPI index-linked and include a 10-year grace period.

Wrapped to triple-A by Dexia-owned Financial Security Assurance (FSA) and MBIA, Standard & Poor's also gave the deal a recovery rating of 2 (in the event of a default the rating agency expects a considerable amount of the debt to be repaid).

The French government granted the 78-year build, operate and maintain concession for the Millau Viaduct to Eiffage in 2001. The project is a 2,460-metre cable-stayed toll bridge designed by Norman Foster that spans the valley of the River Tarn in southern France. Eiffage has over two years of operating experience running the project after it opened to traffic in December 2004.

All-in pricing on the deal is around 70bp. This is considerably higher than on the E18, which priced all-in below 40bp, but revenues on the E18 were based on availability payments rather than the tolls used on the Millau Viaduct.

There is no imperative on the banks' part to get the debt further syndicated given that it has a zero risk weighting. However, part of the debt may be sold down to a small number of Eiffage relationship banks.

Debt for the original 2001 financing was around Eu400 million, in the form of shareholder loans, which Eiffage funded through a corporate loan arranged by BBVA, CIC, Credit Agricole and Société Générale.

The new deal is structured with a downstream loan from VP2 to Compagnie Eiffage du Viaduc de Millau (CEVM) that is smaller than the amount borrowed, thus accounting for Eiffage's dividend. Lenders do not have direct recourse to CEVM and are therefore reliant on dividend and interest payments from CEVM to its holding company, as well as repayment of the principal on the original inter-company loan from Eiffage.

High leveraging is one of the weaknesses highlighted by S&P's analysis of the deal, with debt to EBITDA of 25.9x at June 2007. The dividend lockups are also relatively low, with triggers at 1.35x during the initial 10-year grace period and 1.17x during the principal repayment phase. Also, as the lending is to VP2 and includes the amount of the dividend, the recourse the lenders will have to the project itself is less than the full amount of the loans.

Against these points, the project has a fully funded debt service reserve account, and the length of the concession tail should help ensure a full debt recovery in the event of the borrower defaulting. Traffic risk is mitigated by the fact that the bridge is the only tolled part of the A75 motorway, while the seasonal nature of the traffic is helped by the fact that tolls will go up in July and August. Moreover, the fact that the debt is index-linked provides a natural hedge as revenues and operating expenditure both increase in line with CPI.

When the E18 closed in June 2006, it appeared that it could be the harbinger of a new wave of wrapped debt for road PPPs as the monolines looked for a way to maintain their relevance in the transport market. With unwrapped debt getting ever cheaper, bond issues – the monolines' bread and butter – were becoming increasingly unnecessary, but wrapped debt allows banks to diversify their portfolios post-Basel.

The only PPP deal to close using this structure since then has been the Bilfinger Berger-sponsored North East Calgary ring road in Canada, where Dexia and Fortis provided the debt, with a wrap from FGIC. However, earlier this summer Sanef raised Eu1.5 billion of wrapped debt, with a drawdown spread over nine years, to finance debt repayments to the French state-owned road finance agency Caisse Nationale des Autoroutes. Dexia and BNP Paribas arranged that deal, with FSA and MBIA providing the wrap.

But August's turbulence in the financial markets may affect the use of wrapped debt in the road PPP market. While projects that are already in the works will probably proceed unaffected, the big issue is what lasting impact there will be on monolines that are badly exposed to sub-prime US mortgage CDOs. That aside, if the upward movement in pricing for such projects materializes as expected, then this could once again make traditional wrapped bond issues a more attractive proposition.

Millau Viaduct
Status: Closed 13 July
Size: Eu573 million
Location: Southern France
Description: Refinancing toll bridge
Sponsors: Eiffage, CDC
Financial advisor: Lazard
Lead arrangers: Depfa, Dexia, EIB
Monolines: FSA, MBIA
Borrower legal counsel: Linklaters
Lender legal counsel: Clifford Chance