Hayovel Lines: Instant take-out

The financing of Highway 431 ends a protracted drought in the Israeli road market, and features a financing structure that future Israeli deals would do well to emulate. It overcomes some of the structural limitations of the country's capital markets to arrive at a refinancing solution that would be suitable for other less liquid financing markets. It also attracted a foreign lender to participate in the deal at a time of heightened tension in the region.

The sponsor of the deal is Danya Cebus, an established contractor owned by Africa Israel Investments. Africa Israel was among the sponsors of the Cross-Israel Highway, a 1999 financing that has cast a long shadow over the country's infrastructure market, and Danya Cebus was among the contractors. The experience was useful, although Cross-Israel was a toll road.

For 431, Israel's Ministry of Finance (MOF) was looking for a private sector builder to operate and maintain the road, but would not ask it to take on traffic risk. The project benefits from an availability payment as well as direct grants, which will be provided following the completion of construction.
The government issued a request for qualifications in May 2003, selected a shortlist, and then issued a request for proposals in May 2004. It selected Danya Cebus in April 2005, after Danya Cebus bid a semi-annual payment of NIS 58 million ($12.8 million), well inside the MOF's estimates.

The concession is for a 23km stretch of highway running between Highway No. 20 (Netivei Ayalon South) in the west and Highway No. 1(Jerusalem–Tel-Aviv) in the east, south of Rishon Lezion and Ramala. The design-build-finance-operate concession has a term of construction plus 25 years, with construction estimated to take 2.5 years. The project includes the construction of 12 intersections and numerous bridges and overpasses, meaning that it has a construction cost of $325.87 million, out of a total cost of $434.5 million.

The size of the project, and the length of the concession, meant that finding competitive long-dated financing was vital. But the Israeli bank market does not extend long tenors, and the Israeli institutional market does not take construction risk. Neither the sponsor or the construction lenders was willing to assume that a refinancing would be possible 2.5 years down the line.

So the sponsor, its lead arranger, Bank Hapoalim, and its financial adviser Shrem, Fudim, KelnerFinance & Projects, put together a two-stage deal where both stages closed at once. This meant gaining binding commitments from both construction and long-term lenders at financial close. The sponsor was fortunate that Hapoalim has both construction and long-term debt appetite and was able to coordinate both facilities.

Standing to one side of the financing is a NIS419 million, 2.5-year facility from HSBC. HSBC's involvement is notable, as is the fact that it has been able to provide a loan of this size. Credit risk is confined to construction risk and the government of Israel's ability to pay, since this loan anticipates the NIS400 million in grants that the MOF will provide in three instalments for the work. The deal is nevertheless a strong vote of confidence in Israel, since the signing of the deal took place on 24 July, in the middle of Israel's conflict with Lebanon.

The construction financing consists of a NIS1.242 billion loan from Bank Hapoalim (44%), United Mizrachi (36.5%), and First International Bank (19.5%). This financing has a tenor of three years, although this may be extended if there are delays in construction. The lenders are thus primarily exposed to the ability of Danya Cebus to complete the project on time and on budget, and have the resources to meet any liquidated damages requirements.

But probably the most challenging part of the financing was persuading the long-term lenders to make commitments to refinance 2.5, but possibly even 5.5, years down the line. Furthermore, the sponsor was able to persuade the long-term lenders to lock in a fixed spread over the Israeli government benchmark. This commitment is unprecedented in the Israeli market. Lenders on this NIS1.236 billion loan are Clal Insurance, the Mivtachim Pension Funds, Harel Insurance, Mivtachim-Menora Insurance and Bank Hapoalim.

There are some conditions attached to the commitment, since the project must enter operations, and must have a minimum rating of AA- from the local rating agency Maalot (an S&P affiliate). Moreover, the pricing is linked to particular ratings levels. If the project reaches a level of AA+, which the base case indicative rating contemplates, then the 21.5-year debt would be priced at below 150bp over the Galil CPI-linked basket of Israeli government bonds. The Israeli government is providing a hedge of the underlying base rate, as well as indexing the availability payments to inflation.

Beyond the construction risk, the road will have a relatively smooth risk profile. In addition to the semi-annual payments, the concessionaire receives NIS0.02 per vehicle km, but this shadow payment will not account for a large proportion of the concession's revenues. In the event of termination, the payment from the MOF to the concessionaire will be sufficient to pay back debt and make equity whole, but little more.

Danya Cebus spent NIS140 million on preliminary work at the site before reaching financial close. Since equity makes up only NIS132 million of the project's financing requirements, it took a small amount of cash out of the project at financial close. Upon the close of the institutional loan, the sponsor will be able to reduce this equity to NIS98 million, and the debt service coverage ratio on the debt will still be roughly 1.2x.

Institutions will find it difficult in the aftermath of the 431 financing to resist sponsor pressure to provide a similar guarantee on a future project. For one, the cross-border dollar market, a feature of the Cross-Israel financing, is still an option, as is the Euro market, and the MOF has indicated that it would provide currency protection in the right circumstances.

But the credit profile of the Israel PPP project, coupled with the amount of grant that the MOF is willing to provide, militate in the favour of the domestic market. The Highway 531 project, for which a tender is now out, features a higher level grant but a similar debt requirement. It could also be an all-local affair.

Hayovel Lines Ltd
Status: Closed 24 July 2006
Size: NIS1.793 billion
Location: Israel
Description: PPP financing for 20km road
Sponsor: Danya Cebus
Lead arranger: Bank Hapoalim
Construction lenders: Bank Hapoalim, United Mizrachi, First International Bank
Grant bridge lender: HSBC
Long-term lenders: Clal Insurance, Mivtachim Pension Funds, Harel Insurance, Menora-Mivtachim, Bank Hapoalim
Sponsor financial adviser: Shrem, Fudim, Kelner Finance & Projects
Sponsor legal adviser: Herzog Fox & Neeman
Lender legal adviser: Yehuda Raveh & Co
Government legal adviser: Levy, Meidan & Co
Government financial advisers: BDO Ziv Haft and TASC