Consensus among participants in the refinancing of the Autovia del Camino Spanish toll-road project deal – Guillermo Bergareche, Associate in Project Finance at Calyon; Carlos de Parias, Director at XL Capital Assurance; and Cristóbal Trias Patout, Financial Director for Autovia del Camino – is that the transaction they closed in 2004 has been considerably enhanced by refinancing.

Navarre regional government granted the shadow toll road concession in 2002, and the original 2004 financing – including a rated European Investment Bank (EIB) loan – was not rated. For the refinancing, concessionaire Autovia del Camino S.A. sought credit ratings from Standard & Poor's. As S&P analyst Lidia Polakovic notes: "the positive consequence of the preliminary 'AAA' insured and 'BBB' underlying debt ratings assigned by Standard & Poor's was the optimization of the return relative to risk."

The key drivers for seeking a debt rating

This enhancement was one of the key motivations for seeking a debt rating for the refinancing. In particular, all three representatives believed that the commercial bank loan would be optimized now that construction risk was diminishing as construction progressed.

Standard & Poor's 'BBB' underlying rating on the debt enabled Camino to obtain monoline insurance for the refinancing's senior debt. As XLCA had insured the EIB loan in the 2004 financing, precedence had already been established for its involvement in the project's refinancing.

XLCA's guarantee represents the main benefit to the transaction from the underlying debt rating. Compared with the 2004 financing, the extension of the wrap to the commercial loan in the refinancing transaction has reduced the debt's cost and extended the overall debt maturity.

Moreover, with a monoline wrap in place, lenders were willing to take on the low risk at a low margin: Calyon, as mandated lead arranger and bookrunner along with Ahorro Corporación Financiera, successfully syndicated the loan among 11 other banks. Without an underlying debt rating and guarantee, in the current market environment Calyon would have expected to see a price of about 40bp to 60bp higher for this type of refinancing.

The project sponsors – Grupo Corporativo Empresarial de la Caja de Ahorros y Monte de Piedad de Navarra S.A.-Corporación (CAN, 48%); FCC Construcción S.A. (40%), one of Spain's largest construction companies, with a wealth of experience in road construction and maintenance; and Navarra Empresas de Construcción S.A. (12%) – have also benefited from the refinancing, because of the project's ability to absorb an increased amount of debt. The refinancing allowed them to maximize returns by boosting leverage, with equity's share falling from 24.6% to 20.5% following the Eu13 million equity reduction that occurred after financial close. Both Standard & Poor's and XL feel more confident, as the average debt service coverage ratio has risen following the tenor extension and decline in financing cost.

Furthermore, the 'AAA' rating achieved via the wrap ensures continued low margins, while bankers will achieve a 100% reduction in the risk weighting used to determine the capital adequacy requirement under Basel II. This reduction in "lazy capital" generates a cost saving that can be passed on to the borrower.

The consensus among the participants is that, thanks to the credit ratings assigned, the refinancing of Camino successfully met all the needs of those involved, providing advantages and a fair deal for everyone.
The significance of an underlying rating

The 'BBB' underlying rating has provided substantial benefits to the transaction participants and the Spanish project finance market as a whole.

The three sponsors – and FCC in particular, given its construction expertise and reputation to uphold in the project finance world – stand to benefit the most from having attained an investment-grade underlying rating in the public domain, due to the likely boost in appetite for future projects involving them as sponsors.

Banks similarly view the underlying rating on projects as a positive step within the Spanish project finance market, as they are able to associate investment-grade projects with specific sponsors. This increased transparency will help sponsors such as FCC to locate financing. Banks will feel more comfortable lending to them, as the investment-grade rating is one more way of confirming the sponsors' ability to develop strong projects.

The government of Navarre is also believed to have gained from the publication of the underlying rating, as a grantor and supporter of a successful investment-grade project.

Certainly, the Spanish project finance market as a whole has benefited from Standard & Poor's assignment of an underlying rating to the Camino project debt. The market is now able to compare investment-grade projects—such as Camino—with speculative-grade ones. Clarity has therefore been enhanced, with the Spanish project finance world now able to identify key factors and risk mitigators necessary for individual projects to achieve 'BBB' status. Therefore, the publication of Standard & Poor's report detailing the rationale behind the 'BBB' underlying rating, including the ways in which Camino was able to mitigate credit risks, should enable greater transparency for future infrastructure projects within the Spanish market.

The Spanish project finance market

The Spanish market environment is exceptionally competitive at present, with banks willing to lend at ever-diminishing margins and longer tenors, despite substantial project risks. Currently, prices of unrated loans fail to reflect fully the projects' credit risk. Huge liquidity, a supportive regulatory framework, highly successful Spanish contractors, and an overcrowded banking market are at the root of this fiercely competitive lending environment, with banks unwilling to be priced out of the market.

Banks take a different approach to risk calculations than the rating agencies, due to the established relationships they have with Spanish project sponsors. They are prepared to accept a low risk return ratio, since they know that sponsors are unwilling to damage their relationship or reputation with the banks given that they depend on them to fund current and future projects.

Consequently, banks typically use a different definition of default than credit rating agencies. Sponsors are allowed to restructure projects to provide for untimely payments without banks deeming this a default.

Advantages of credit ratings for Spanish loans

Monolines are responding to the competitive climate, and sponsors are becoming increasingly aware of the value on offer from compressing margins with guarantees.

Advantages are there for the taking among sponsors who have large portfolios of deals. The market is currently too active to enable sponsors to take a retrospective approach to their portfolios; focus is on future deals. However, if activity cools, it is likely that the project finance market will begin to optimize existing deals within their portfolio, as is the case with Camino. Therefore, despite the time constraints preventing projects from obtaining a debt rating on their initial financing, ratings will be increasingly sought when revisiting established projects.

Monoline insurance, and consequently credit ratings, are proving particularly attractive for projects with limited uncertainties. Camino's key construction risks have declined as the construction period draws to a close. In addition, traffic risk is mitigated by the road's shadow toll nature and long traffic history. In such a context, a credit rating coupled with a monoline wrap has provided significant value in the form of low loan pricing, increased tenor, and an improved debt service cover ratio.

In addition, if the number of bank loan ratings escalates in the Spanish project finance market, banks will gain a clearer understanding of the definitions rating agencies and monoline insurers employ. Terminology, such as "default," "recovery," and "restructuring" will become more independent of one another and less confused, bringing increased transparency to the market.