Banco Santander has launched syndication on the Ps37.1 billion ($3.34 billion) debt for the first of the FARAC roads packages in Mexico. The whole financing is denominated in pesos, and is the largest bank financing for a private borrower in the country's history. The deal is set to close on 25 September 2007, with the handover and disbursement date set by the Secretaría de Comunicaciones y Transportes (SCT) for 3 October 2007.
The holder of the 30-year concession is a consortium of Goldman Sachs Global Infrastructure Partners (GSIP) and ICA, which won the assets in July 2007, with a bid of Ps44.051 billion.

Santander is global co-ordinator on the debt, and initially underwrote the whole facility, but has now brought in Dexia to underwrite the equivalent of $1 billion in pesos, and Nord/LB to underwrite $500 million equivalent. The books are offering mandated lead arranger (MLA) tickets of $300 million equivalent in pesos, for upfront fees of 110bp and underwriting fees of 10bp. The deadline for commitments was 14 September 2007.

The bookrunners have issued MLA invitations to Citi, BBVA, HSBC, Scotia, Inbursa, Banorte, Banobras, all of which have a presence in Mexico. They have also issued invitations to cross-border lenders BNP Paribas, WestLB, ING, Depfa, Fortis, Caja Madrid, Ahorro Corporacion, Credit Suisse, RBS, Merrill Lynch, ABN Amro, Barclays and Banesto. In order to participate, banks will have the option to fund their commitments through local banks, Santander's derivatives desk, or by placing their own cross-currency swaps.

The debt has a seven-year maturity, and features three tranches; a Ps31 billion acquisition loan, a support facility of Ps3 billion and a capex tranche of Ps3 billion. The government requires spending of Ps1.5 billion on greenfield sections, and Ps3 billion on upgrading the existing roads. The latter tranches are to cover this required spending. Including the Ps15 million in equity, of which GSIP provided 80% and ICA the remaining 20%, the total cost of the concession is Ps48.56 billion before financing costs. ICA will take responsibility for the operations and maintenance of the roads.

The government cap for concessions on existing roads is 20 years, so the greenfield aspect of the project is fundamental to justifying a 30-year concession period and the higher bids it commands.

The facility is priced starting at 165bp over TIIE (the Mexico interbank rate), rising to 225bp over the life of the debt. The bullet facilities feature a sweep of excess cash, which starts at 25% in the first year, stepping up to 50% in the second year, 75% in years three, four and five, and 100% in the last two years. This step-up is designed as an incentive for the sponsors to refinance before the maturity of the debt, and if the Mexican capital markets remain benign, the sponsors hope to take out the bank loan with a bond within a year.

The concession agreement demands that the upgrade and greenfield construction must be executed within a three-year period. The concessionaire may renegotiate the terms of the concession agreement in the case of change in law, or force majeure, and the SCT retains liability for events on the road before its transfer. According to the bookrunner, the worst case revenue scenario would still allow banks to be repaid in a hypothetical 17 years, leaving a hypothetical 13-year tail. With this in mind, the leads have hedged the base interest rate of 90% of the facility for 17 years.

According to the arranger, the financial structure assumes strong long-term GDP growth in Mexico, as well as traffic growth and toll revenue growth at a similar rate to previous years. Lenders also have to contend with drivers' unwillingness to pay tolls as, under Mexican law, the state must be another untolled alternative route. However, these free roads are often ill-maintained, and sometimes even unsafe, and the lenders assume that the Mexican public will become more amenable to paying tolls over time.

The bid was the only one of six offered entirely in pesos, and won with only a 1.4% premium over its closest opponent. The Inter-American Development Bank has offered the sponsors a $400 million partial guarantee facility, but this has not been mobilised for the bank debt. However, the product may yet prove its worth in a bond refinancing.

The assets in the package comprise a 309.7km stretch between Maravatio and Zapotlanejo; 118.5km between Zapotlanejo and Lagos de Moreno; 103.9km between Leon and Aguascalientes; and 26km between Guadalajara and Zapotlanejo. The toll tariffs will be the same across the four roads, at Ps1.2 ($0.11) per kilometre.

Three of the four roads were originally built and operated by ICA, and taken over by the government at the time of the Tequila Crisis in 1994. The government took over the roads and placed them in a trust, erasing sponsor equity, and repaid bank lenders to the roads with government debt. This debt, as well as associated prepayment penalties, equates to a total obligation of $20 billion.

There are 43 such roads in the trust, referred to as FARAC, of which the four now in syndication are the first to be re-issued as concessions. This first package had been valued at under Ps30 million, and so the winning bid is something of a pleasant surprise for the SCT. The SCT is using the proceeds of this sale to defease the legacy debt from the takeover, and construct a free road between Manzanillo and Durango.

Collectively these four roads account for 11.8% of the traffic across the FARAC network. Following the strength of the interest in the first, more of the network is likely to be offered for concession imminently. One road in the trust, a section between México and Puebla, accounts for 12.88% of the traffic revenues. The whole network is now valued by the SCT at $25 billion.

Red de Carreteras de Occidente
Status: Due to close 3 October 2007
Size: Ps44.051 billion
Location: Mexico
Description: 30-year concession of four toll roads
Sponsors: Goldman Sachs Global Infrastructure Partners, ICA
Equity: Ps15 billion
Debt: Ps37.1 billion
Maturity: 30 years
Mandated lead arrangers: Santander (global co-ordinator), Dexia and Nord/LB (bookrunners)
Legal counsels to lenders: Allen & Overy, Ritch Muller
Legal counsel to borrower: White & Case
Traffic consultant: Steer Davies Gleave
Legal counsel to SCT: Galicia y Robles
Financial advisers to SCT: NAFIN, Citigroup