Hermes Airports: Awarded and rewarded

The Eu612.5 million ($796 million) Cyprus airports project closed in May 2006, and was the first major PPP transaction in the country. It was also successfully closed against the backdrop of a chequered bidding process, and potential legal challenges. While generous by the standards of airport concessions elsewhere, the deal is a milestone in the development of recent EU member Cyprus' infrastructure.

The 25-year build-operate-transfer concession was awarded to the Hermes Airports consortium by the Government of Cyprus. It involves upgrading and developing the Larnaka and Paphos international terminals. The project will increase the capacity for handling passengers in the airports to 7.5 million and 2 million respectively.

The concession structure is much more generous than for comparable airport assets. Hermes will pay 33% of gross revenue back to the Government of Cyprus, and a fixed annual fee of Eu3.5 million, a rate significantly lower than, for example, those seen in the New Delhi and Mumbai airport concessions where the rates were 43.6% and 38.7% respectively. The deal is also more favorable to the project company compared with projects such as the Budapest airport, awarded to BAA, and the TwoOne concession of Bratislava airport, which both closed while the Cyprus deal was in negotiation.

Despite the 21-month hiatus between Hermes' appointment and financial close, the structuring of the deal is still complex. Financing for the loan was traditional non-recourse and limited recourse, structured 80:10:10, senior debt to mezzanine to equity. The senior term loan is Eu482 million, maturing in December 2025, with an equity bridge of Eu60.25 million until December 2010 drawn pro-rata with a mezzanine facility of Eu60.25 million (due 2025) in priority to the senior term loan. The senior debt initially pays 125bp over Libor, increasing to 160bp over time.

The mandated lead arrangers were ING, Royal Bank of Scotland, WestLB and Société Générale, which syndicated the debt in chunks of Eu24 million to a group of participants that included Allied Irish Banks, Bank of Ireland, Bayerische Landesbank, Credit Industriel et Commercial, Depfa, EDC, Fortis Bank, HSH-Nordbank, KBC, LloydsTSB, Natixis (Natexis at time of close), and National Bank of Greece.
The deal's shareholders including Bouygues Batiment, YRV (Vancouver), Aer Rianta, EGIS Projects and Nice Airports Ingeniere. The Cypriot partners responsible for such aspects of the project as construction and maintenance include Cyprus Trading Corporation, Hellenic Mining Company, Iacovou Brothers and Charilaos Apostolides.

The project overcame a number of difficulties in reaching close. Firstly, the sponsor's first choice of bidder, the Alterra consortium (comprising Bechtel, Singapore Changi Airport Enterprise and Manchester Airport), withdrew from the process over a disagreement over Alterra's wish to renegotiate commercial terms after the bidding process had taken place. Hermes had effectively stood down from the bidding process after the initial selection had been made, then reformed its bidding team after Alterra's withdrawal from the concession. Alterra's bid had been successful in part due to the proposed payment of 50% of gross revenues to the government. Hermes, whose bid had come in second place, had offered 33%, with the third-ranked bidder coming in at 25%.

Hermes was then obliged to honour its original proposal, and thus deal with an unexpected increase in steel prices in the area, and account for increased interest rates. Had the Cypriot government allowed a revised bid, the whole process would have been effectively reopened to all bidders, and be open to a challenge from the third-placed consortium. The obligation to keep the return percentage at 33% resulted in a modification not to the financing but to the design of the airport, and forced the contractor to reassess its contingency margins and reduce its capex.

However, the delay that ensued in the renegotiation period provided some degree of relief for the sponsor company, as the gradual recovery to air traffic volume following 9/11 was underway and thus revenue streams at the airport were increasing despite increased security costs.

Furthermore, the government raised airport tariffs in this pre-privatisation period, thus resulting in increased revenue. But in the interim, the Turkish government approved the expansion of AirCan, a competing airport in the occupied North of the island, increasing potential competition for tourists from the north. While this approval could be a financial threat to the health of the Larnaka and Paphos projects, tourism growth in the south remains strong, and tourism accounts for 90% of the south's revenues.

Hermes used ABN Amro as its financial advisor and Norton Rose as legal counsel. The lenders used Freshfields for legal counsel. The Cypriot Government's financial adviser was PricewaterhouseCoopers and its legal counsel was Pinsent Masons.

Hermes Airports Ltd
Status: Closed May 2006
Size: Eu612.6 million
Location: Cyprus
Description: 20-year concession for the development and operation of two airport terminals
Sponsors: Bouygues Batiment, YRV [Vancouver], Aer Rianta, EGIS Projects and Nice Airports Ingeniere
Debt: Eu482 million senior term loan, Eu60.25 million equity bridge drawn pro rata with Eu60.25 million mezzanine, Eu10 million working capital
Tenor: Senior term loan and mezzanine mature 2025, equity bridge due 2010
Margin: 125 bp over Libor rising to 160bp over the life of the loan
Mandated lead arrangers: ING, Royal Bank of Scotland, Société Générale, WestLB
Sponsor financial adviser: ABN Amro
Government financial adviser: PwC
Government legal counsel: Pinsent Masons
Sponsor legal counsel: Norton Rose
Lender legal counsel: Freshfields