Quiport: Multi-staged and multi-sourced

The financing of a new international airport for Ecuador's capital Quito was a protracted and complex process. It was a deal that endured several setbacks, a rollercoaster political framework, and brought together a large and unwieldy group of lenders. Because natural resources projects currently dominate emerging markets financings, the deal is likely to be difficult to repeat in the near term.

Quito, Ecuador's second largest city, has long been in need of a new airport, and the country's government first proposed a rehabilitation in the 1980s. In 1996 it went so far as to issue a request for proposals for a new terminal, but macroeconomic conditions, which included a 90% inflation rate, discouraged bidders form going far. It was only after 2000, when the administration of president Jamil Mahuad introduced the dollarisation of the country's economy, and substantial reserves of oil were discovered inland, that conditions improved.

Among those responding to the initial bid was Aecon of Canada, and after the economy stabilised it made an unsolicited approach to the municipality of Quito, which was in the process of assuming responsibility for the city's airport. In October 2001, Airport Development Corporation and Aecon submitted a bid under a memorandum of understanding signed between the government of Canada and the municipality earlier that year. The municipality duly launched a Swiss challenge to attract alternative bids, but no others were forthcoming.

Gaining the concession, however, was probably the smoothest part of the process. Municipal politics in Quito, which is shorn of some of the ethnic and social tensions that characterise national politics, provided a more stable backdrop to developing a concession agreement. But national interests, Ecuadorean law, and lender perceptions of country risk still coloured the financing process.

And the two original sponsors still needed to bring in sufficient equity. The initial bid featured support from Techint of Argentina and ABB Equity Ventures, the second of which had airport concession experience that exceeded that of ADC, and might have taken up to half of the project's equity. But ABB decided to abandon the project equity business, and Techint's participation fell victim to the crisis that enveloped Argentina in 2001.

By 2004, Houston Airport Systems came onboard, bringing with it a respectable slice of financing from the US export credit agencies, and was joined by Andrade Gutierrez, a Brazilian contractor. The equity make-up went from Techint 40%, Aecon 40%, and ADC 20% to Andrade Gutierrez 34%, Aecon 34%, ADC 6.1% and Houston 25%. Houston's contribution is structured in such a way that its stake is contributed in kind rather than in cash and its 25% ownership interest is notional and designed to meet the minimum threshold for financing from the Overseas Private Investment Corporation.

Aecon provides 45.5%, Andrade Gutierrez 45.5%, and ADC 9% of the $74 million in cash equity contributed to the project. Also counted as equity is $142 million in funds from operations generated from the existing terminal, which the sponsors have taken over and operate while they construct the new facility. The sponsors have run this terminal since November 2002, long before the signing of the 35-year concession, and have so far operated it without sparking great opposition.

The process of raising debt was equally painstaking. Opic provided $200 million, US Ex-Im provided $63.8 million, in proportion to the US-sourced goods and services used in building the project, Export Development Canada provided $37.5 million, and the Inter-American Development $75 million, its upper limit for direct lending to private projects. Managing this diverse group of lenders proved challenging, since each bank had its own social and environmental policies to satisfy, although the banks did share legal counsel, in the form of Allen & Overy. Moreover, with the exception of Ex-Im, which retained HSBC as an adviser, outside advisory expertise was in scant supply, especially after the sponsors and Dresdner parted ways several years before financial close.

The project, though, still had to deal with construction risk and regulatory risk perceptions. The construction contract is the most novel part of the project, since the municipality signed a fixed-price $415 million engineering, procurement and construction contract with the Canadian Commercial Corporation, a Crown corporation owned by the government of Canada. The CCC in turn subcontracts the project to a 50/50 joint venture of Gutierrez and Aecon, with Aecon the manager.

The concession is between special purpose vehicle Quiport and the Corporacion Aeropuerto y Zona Franca del Distrito Metropolitano de Quito (CORPAQ), a company owned by the municipality. The Ecuadorean military, through the Direccion de Aviacion Civil, still controls air traffic control, and government still controls security functions, but the developers run substantially all of the functions of the airport.

Passenger growth at the airport has been strong. While Guayaquil is a larger commercial centre, and handles most of the tourist traffic for the Galapagos islands, Quito has established itself as a centre of the international cut flower trade, and handles government traffic. Landing fees will make up the bulk of the project's revenues.

The multilateral lenders approved their commitments at various stages, Opic in 2003, Ex-Im, EDC and the IDB in 2005, and the financing documents for the project signed on 25 August 2005. This did not, however, mark true financial close for the project, since the process of meeting the debt's 120 pages of conditions precedent took until 29 June 2006, when the loans funded. The lenders required, among other things, a legal opinion from the attorney general of Ecuador supporting the concession and an amendment and restatement of the loan on 23 May 2006.

Steve Nackan, the president of Aecon Concessions, characterises the financing process as a struggle to maximise available lending capacity in an inhospitable market. Nevertheless, the process of co-ordinating lenders and, in particular, the novel step of bringing in a government as umbrella EPC contractor, are elements that other emerging markets sponsors should look to emulate.

Ecuador's new president Correa has hinted at a new framework governing oil exploration in Ecuador. But he has been largely silent about the capital's new private airport.

Quiport SA
Status: Signed August 2005, funded June 2006
Size: $585 million
Location: Quito, Ecuador
Description: New main airport development for Ecuador's capital
Sponsors: Aecon (30%), Andrade Gutierrez (30%), Houston Airport System (25%) and Airport Development Corporation (15%)
Debt: $376 million
Lenders: Opic, EDC, US Ex-Im, IDB
Financial adviser to US Ex-Im: HSBC
Lender legal: Allen & Overy (international), Bustamante y Bustamante (local)
Sponsor legal: White & Case (international), Perez, Bustamante y Ponce (local)
Lenders' engineer: Mott MacDonald
Lenders' environmental: Golder Associates
Lenders' insurance adviser: Marsh
Sponsors' insurance advisers: JLT, Aon