The NOK3.15 billion (Eu399 million, $501 million) debt financing for the E18 Grimstad-Kristiansand road project in Norway, which closed on 23 June, is the first European PPP deal outside Spain to use wrapped bank debt.

Following on the heels of the Golden Ears project in Canada, which also used wrapped debt, the E18 looks like setting a trend for European PPP, as banks look at a more ways of funding projects against monoline guarantees before Basel II comes into force next year.

The E18 is a design-build-finance-operate (DBFO) concession involving the construction of a 40km four-lane motorway, and forms an important part of the transport corridor between southern Norway and continental Europe. Although it is a real toll motorway, there is no transfer of traffic risk to the private sector, as user fees go straight to the state-owned road operator with the concessionaire receiving revenues from primarily from availability payments.

The project reached financial close just 77 days after it was awarded to Agder OPS Vegelskap, a Bilfinger Berger-led consortium. The other bidders for the concession were Skanska/Laing and Strabag.
XL Capital Assurance is the monoline wrapping the E18 project to AAA from an underlying investment grade rating. The fee is just under 20bp, which is in line with the current market rate for road PPP deals.

The lead arrangers of the NOK800 million commercial debt are BBVA, Depfa, RBS and the Norwegian bank Nordea. This debt is split equally between the four and will not be syndicated any further in light of the fact it features a monoline guarantee. The project also features a Eu198 million EIB loan and a NOK750 million tranche from the Norwegian Investment Bank.

The commercial debt has a tenor of 28 years, while the EIB and NIB loans mature in 26 years. The average debt service coverage ratio is in the region of 1.2x.

The concessionaire's shareholders – Bilfinger Berger BOT (50%), Sundt (35%) and E. Phil & Sons (15%) – will also contribute Eu99 million of equity to the project. The sponsors have managed to secure extremely tight margins on the deal, with an all-in margin that is below 40bp over Libor.

By contrast, the financing for Norway's last PPP project, the E39 Lyngdal-Flekkefjord road project, which signed in July 2004, priced at between 70bp and 90bp – a measure of just how much the market has tightened in the intervening years. The country's one other PPP deal, the E39 Klett-Bardshaug project, closed in June 2003 and priced at 100bp over Libor pre-completion and 85bp during operation.

Sponsors are raising debt cheaply for road projects across Europe because of persistent high levels of bank liquidity, and Bilfinger Berger has closed a number of deals notable for their tight margins and use of wrapped debt. The German constructor was lead sponsor on the £131 million (Eu198 million) M1/Westlink project, which achieved what was then the tightest ever spread for a UK index-linked PFI bond when it closed in February, and in March it refinanced the M6 Duma motorway in Hungary using a wrapped bond issue that priced at just 27bp over Euribor.

But the E18 owes its structure most to the Golden Ears bridge in Vancouver. XLCA also provided a wrap – together with Ambac – for that project's C$1.046 billion financing, for which Depfa and Dexia were arrangers. Golden Ears, a 35-year concession, priced at 70bp over the CDOR all-in; the E18 was able to price more cheaply because it featured less debt, and a shorter tenor.

Such deals are likely to become increasingly common as monolines offer tightly priced wraps in order to compete with the bank debt market. The banks, for their part, are happy to lend where there is a guarantee in place, thus lowering the risk weighting of their portfolios while Basel II looms. Market rumour suggests the next major deal to be awarded to a preferred bidder – Austria's Eu850 million Ostregion project – will go to Hochtief, with Ambac providing a monoline guarantee and Deutsche Bank arranging.

Apart from involving many of the same players, another similarity between the E18 and Golden Ears is that both are tolled infrastructure assets where the concessionaire's revenues come mainly through availability payments, with a performance element also in place. All three of Norway's PPP projects to date – which are part of a single pilot programme – have followed the same concession structure.

Many market observers believe that keeping volume risk in the public sector is the most cost efficient way of financing such PPP deals. The E18 would have been particularly unattractive as a real toll concession, as it is a road used by vacationers with highly seasonal traffic volumes. In July, traffic is about 60% higher than the annual average of 10,000 cars a day.

But despite this success, Norway now waits while politicians assess the E18 and the two E39 projects before announcing any further PPPs, and no new projects are currently in the pipeline. Sponsors will hope that more projects follow, as the speed with which the project moved from tender launch in early 2005 to financial close stands in sharp contrast to PPP programmes in much of the rest of Europe.

E18 Grimstad-Kristiansand
Status: Closed 23 June
Size: Eu500 million
Location: Southern Norway
Description: DBFO for a 40km highway in southern Norway
Debt: NOK3.15 billion (Eu399 million, $501 million)
Sponsors: Bilfinger Berger, Sundt, E. Phil & Sons
Lead arrangers: BBVA, Depfa, RBS, Nordea
Monoline: XL Capital Assurance
Borrower legal: Norton Rose, Thommessen
Lender legal: CMS Cameron McKenna, Wiersholm