River City Motorway: Listed and lifted

The financing of the Brisbane North-South Bypass Tunnel in Queensland has provided a much-needed boost to the Australian roads market. It demonstrates that there are still strong and compelling project opportunities in markets outside of New South Wales. It also highlights the growing importance of Queensland, home to a growing proportion of the country's population, in infrastructure investment.

The A$2.705 billion ($2.125 billion) North-South Bypass Tunnel (NSBT) is the first privately financed toll road in the city. The concession is unusual, in that the awarder is Brisbane City Council, rather than the state government of Queensland, the first time an Australian deal has gone forward at a municipal level. Moreover, the concession is structured around both a revenue-sharing arrangement with, and an upfront contribution from, the council.

The main feature of the 5.8km concession is a 4.8km tunnel, the longest of its kind in Australia. It connects north and southbound traffic, and is designed to reduce congestion in the centre of the city. The project is the first component of the city's TransApex transport plan, and the Council decided to use a concession structure because it wanted to ensure that the road was operational by 2010.

The sponsors of the road are ABN Amro, Bilfinger Berger BOT (with its Australian subsidiary Baulderstone Hornibrook), and Leighton Contractors. The three won the concession in on 27 April 2006, beating the Brisconnections grouping of Macquarie, Thiess, John Holland and Hochtief. But the sponsors are best described as equity underwriters, since the project company ultimately raised the bulk of its equity from a public issue.

The project invites comparisons with the ill-starred Cross-City Tunnel in Sydney, which was similarly designed to move traffic away from a city's centre, but which has experienced severe financial difficulties, and is now in receivership. News of the Sydney operator's financial difficulties spread during the period around financial close and syndication.

Nevertheless, the NSBT concession is structured both to deal with potential weakness in traffic levels, and to garner good levels of public support from city residents. The concession features a large upfront cash contribution from the city, although this is staggered over the construction period. This A$503 million contribution will not be contributed at close, so the sponsors have raised a debt facility of the same size, the first time such a grant anticipation loan has been used in Australia.

In return, the project features a base case revenue sharing arrangement. The term of the concession is 45 years, a little longer than is typical in the country's road concessions, but in years 35-45, 30% of the forecast revenues from the tunnel will be shared with the city council. These cashflows are probably the least risky available to the concession, provided growth in the city's traffic remains on a long-term upward trajectory. It also preserves lender access to cashflow in the early years of the debt.

The sponsors also decided to offer equity to the public and create a listed project company, rather than raise it from unlisted entities. This strategy was designed to take advantage of strong equity markets in the early part of 2006, and also stir up driver interest – shareholders received A$100 credits to use the road, and south-east Queensland residents received their own IPO allotment. The equity units were priced at A$1, and consisted of two stapled securities, of which half was paid in at close, and half later.

However, while structured with due care, and underwritten by ABN Amro Rothschild, the initial public offering fell flat. Publicity surrounding Cross-City, as well as a general cooling in sentiment towards infrastructure stocks, meant that the shares did not reach their A$0.50 initial instalment price, and debuted at $A.0.46. The shares still trade at around this level, but management has expressed the hope that the price will recover during the ramp-up period. The shares also feature a dividend reinvestment plan, which is designed to further minimise the project's cash outlay during construction.

The bank debt, however, proved much more popular. The four-year construction debt breaks down into a A$155 million equity bridge backed by an A+ letter of credit and priced at 40bp over BBSW (hedged to 6.531%), a A$1.336 billion construction loan priced at 150bp (and hedged at 6.6%), and the A$503 million council works bank debt loan, which carries the same margin and hedge. Post completion, the equity bridge and works loans will be repaid, and the construction loan converts into a four-year bullet facility priced at 140bp and 70% hedged with a base rate of 6.483%. This is split into two tranches of equal size.

The lead arrangers are ABN Amro, Calyon, HSBC, National Australia Bank and WestLB. The arrangers opted to dispense with a subunderwriting stage and went straight into retail syndication. Their reward was A$2.7 billion in subscriptions, and a 19-strong participant group – ANZ, BBVA, China Construction Bank, Commonwealth Bank, DEPFA Bank, ICBC, KBC, UniCredit, United Overseas Bank, Westpac, all as arrangers, DZ Bank, as co-arranger, and AIB, Bayern LB, Fortis, HSH Nordbank, OCBC Bank, Mega Holdings, ERSTE Bank, and NordLB as managers.

The syndication process went some way towards erasing memories of the equity issue, and was complete in October. The IPO process has left other sponsors wary of creating listed vehicles, an attitude that will persist if global stock prices remain depressed. But the concession structure will be widely imitated by governments looking to finance projects with similar risk profiles. Brisbane has already appointed Ernst & Young, the adviser on the North-South Bypass Tunnel, to help it put together a concession for a road to the city's airport.

River City Motorway
Status: Closed 4 August 2006, syndicated October
Size: A$2.705 billion
Location: Brisbane, Queensland, Australia
Description: 45-year concession for 5.8km road and tunnel project
Concession awarder: Brisbane City Council
Sponsors: ABN Amro, Bilfinger Berger, Leighton Contractors
Senior debt: A$1.86 billion
Lead arrangers: ABN Amro, Calyon, HSBC, National Australia Bank and WestLB
Traffic consultant: Maunsell
Sponsor financial adviser: ABN Amro
Government financial adviser: Ernst & Young
Sponsor legal adviser: Mallesons Stephen Jacques
Lender legal adviser: Clayton Utz