After months of delays and missed signing dates the Eu472 million ($599.5 million) Thessaloniki Tunnel project signed in Athens on 31 October. Lead arranged by HVB, Millennium BCP and EFG Telesis Finance, the deal is the first in a Eu8.4 billion six-road Greek PPP programme to reach financial close.

The 6.5km real toll project is a 4km tunnel, 1.5km of which is submerged. The tunnel will run under the seabed of the port, providing a shortcut from one side of the city to the other. The toll will be set at Eu1.10 and the tunnel is expected to handle 60-90,000 cars in its first year.

The financing comprises a four-year Eu96 million construction bridge, a Eu20 million standby facility, a 25-year Eu304 million tranche (underwritten 50/50 by the EIB and the commercial banks) with Eu168 million in letters of guarantee from the banks for the Eu152 million EIB portion of the debt, which allows the borrower to benefit from a low funding rate.

Pricing on the senior debt will be 140bp over Euribor during the four-year construction period. It then steps up or down depending upon the performance of the project. If the project performs as expected pricing will rise to 155bp over the tenor of the debt. If traffic and revenues are much better than expected the margin drops to 120bp.

Lenders concede that because the financing has suffered delays – the bid was originally put together in November 2004 – and the bank market has become more liquid since pricing was agreed, margins would have come in at up to 20bp lower had the deal been financed at the current market norm. On the upside the arrangers are already seeing a strong demand from banks for a piece of general syndication.

As with all the deals in Greece's PPP programme, progress towards signing has been slow. The Thermaiki Odos consortium (jointly owned by Hellenic Technodomiki and an Archirodon Boskalis group) was appointed preferred bidder in May 2005 and the 18 months it has taken to close financing have been dogged by interruptions and delays.

Five bidders were originally invited to submit fully underwritten proposals – consortiums led by Bilfinger Berger, Hochtief, Bouygues, Vinci and Hellenic Technodomoki. Under Greek law losing bidders are allowed to challenge the decision repeatedly. In August 2005 one challenger appealed to the Greek Supreme Court on the grounds that the winning consortium would be unable to deliver the project. It took until February 2006 for the court to throw out the case.

Delays continued right up until signing. Two agreed signing dates were missed and because of the delays, Bank of Ireland, which originally had a MLA role on the deal, pulled out.

The Hellenic Technodomiki/HVB team was behind the last Greek transport deal to close – the Athens Ring Road in 2000 – which helped it land the Thessaloniki deal in the face of more aggressive pricing from other consortiums' proposals. Much of the decision to award was based on a formula that worked out which bid proposal would pay the most revenue to the authority. Thermaiki Odos won because it projected significantly higher traffic levels.

The project features a revenue-sharing scheme designed to reduce the burden to the sponsors if the project underperforms but also provide a higher pay-off for the authority if the project performs better than expected. The tunnel only has to pay the government if it makes a profit, so there is no set amount from the toll that goes to the authority.

Ironically, the Thessaloniki deal has proceeded more smoothly than other roads in the programme. Although it was the first to appoint its preferred bidder, the other roads (with the exception of the Ionian Road) are still a long way from closing. The Maliakos to Kleidi coastal road (the second project to appoint a preferred bidder) has only recently started to progress again, after it was caught up in a legal challenge that lasted a year.

Although the Greek government still needs to ratify the Thessaloniki Tunnel – which could take until February 2007 – the deal, with its solid margins and flexible revenue-sharing structure, should do a lot to bolster confidence in the Greek market, and go some way to erasing the memory of the Thessaloniki Metro deal, which was cancelled by the Government in 2003 when the preferred bidders (a Bouygues-led consortium) could not agree on financing.

The next challenge will be closing some of the remaining road projects. The Eu1.15 billion Ionian Road has been progressing steadily since the Hellenic Autopistas consortium (comprising Cintra, ACS and GEK) was appointed preferred bidder in June. The debt's underwriters are BBVA, EFG, Fortis and Santander, and the margins range between 95bp and 115bp. Bankers are also optimistic about the Eu850 million Corinth-Kalamata road and Eu700 million Maliakos-Kleidi, both of which could close early in the new year.

Thessaloniki Tunnel
Status: Signed 31 October 2006
Size: Eu472 million
Location: Thessaloniki, Greece
Description: Real toll PPP tunnel project.
Sponsor: Thermaiki Odos (Hellenic Technodomiki/Archirodon Boskalis)
Debt: Eu450 million
Lead arrangers: HVB, Millennium BCP, EFG Telesis Finance.
Lender legal advisers: Allen and Overy
Sponsor legal advisers: McDermott, Will and Emery
Sponsor financial advisers: Ernst &Young