The Eu622 million Cyprus Airports PPP project has reached financial close after a protracted genesis. The deal has been lurking for some time, with the commercial documentation signed almost a year ago. Closing took place on Friday 12 May after 21 months of detailed negotiations since Hermes was appointed preferred bidder.

Despite the banks closing on a term sheet that is over a year old, the margins and gearing are aggressive, but the structuring is more favourable to the project company compared with other European airport deals – such as Budapest, Bratislava – that have closed in the interim.

Prior to the award of the 25-year concession to the Hermes Airports consortium, the Cypriot government initially chose the Alterra consortium. However, Alterra withdrew because of a dispute over commercial terms. According to two sources, the Alterra special purpose company was over eighteen months old and without any fixed assets when the bidding was due, and bid extremely aggressively at 50% revenue share with the government. An impasse was reached with the government when Alterra realized that the deal was not bankable and tried to renegotiate and clarify the commercial terms. The Alterra consortium included Bechtel, Singapore Changi Airport Enterprise and Manchester Airport.

The new preferred bidder, the Bouygues-led Hermes Airports consortium is backed by four lead arrangers ING, RBS, SG and WestLB. Along with Bouygues Batiment, the consortium also includes YVR Airport Services, the Vancouver based airport operator, who with EGIS Projects and Nice Airports of France, will provide certain operational services. Aer Rianti, the Irish international airport retail specialist and local retail group, CTC, will handle the retail operations at both airports. And local companies, Hellenic Mining, Iacovou and Chapo will be responsible for a variety of construction, maintenance and other aspects of the expansion and operation of the airports.

The concession involves the renovation and expansion of Larnaka and Pafos airports, Cyprus's only international airports. Hermes will take over the existing airports and construct new passenger terminals and associated infrastructure at both airports. A new passenger terminal at Larnaca will have a 9 million passengers-per-year capacity, and the new terminal at Paphos will cater for 2.7 million passengers per year. Construction began in early June, with Paphos due for completion at the end of 2008, and Larnaca at the end of 2009. Together, the enhanced airports will be able to handle over 10 million passengers annually. The company will also undertake further expansion of the airports as demand requires.

Hermes will pay 33% of gross revenues to the state, and a fixed annual concession fee of Eu3.5 million. Although it is difficult to compare commercial terms on other airports, Hermes appears to have bagged a good deal compared with other recent awards where the revenue share is known – perhaps indicative of the fact that the Hermes was named preferred bidder almost two years ago. For example, the New Delhi and Mumbai airport concessions which were aggressively bid by European players were won with the government receiving 43.64% and 38.7% of the revenue respectively.

The funding package backing Hermes comprises Eu482 million, 20-year senior debt, a Eu62.5 million equity bridge repaid as a bullet a secured junior note issue in 2010, and a Eu62.5 million, 20-year mezzanine tranche. The senior debt initially pays 125bp over Libor ratcheting over time to 160bp. The margin on the mezzanine is unknown save for one source's description, "juicy".

The syndication strategy is still in a formative state but is expected to launch at the end of June or the beginning of July.
Although the lenders are exposed to some traffic risk, they have protection from a generous 95% government guarantee across the board and the usual clutch of risk mitigants.

Notably, there is an explicit contractual provision that will trigger a compensation event if the airport to the north of the island, Kingsfield, which is 12 miles away from Larnaka, gets developed and diverts passenger traffic. There are also explicit provisions for a major external shock such as a 9/11 catastrophe. The mechanism by which these provisions works is similar to a force majeure event, but go further because it is not limited to the project's host country, and includes other events. The provisions allow a temporary respite in payments, rather than a termination, which the project company can make up in better times – airports have proven to be very resilient to external shocks.

One banker familiar with the deal says, "I think it's a good deal all round, at the time the term sheet was put in place it was very aggressive, although the market has moved on since then. It should sell like hot-cakes in syndication."

Financial close was achieved against the backdrop of a European Commission investigation into the award of the contract after several of the disappointed bidders complained that the Cypriot government changed the terms of the airports contract. These changes include the government taking on responsibility for the provision of security and a more lenient performance regime – such as a reduction in performance penalties and longer waiting times at the check-in desks.

In November last year the commission sent a letter to the Cypriot Government outlining their concerns of a possible breach in community competition laws.

There are also complex legal vires questions involved – for instance, there is some debate as to the date of the tender and whether Cyprus was within the EU at the time, and what sanctions the EU has, if any, at its disposal. All parties Project Finance Magazine spoke to in the deal are extremely confident that the litigation will come to nothing.

Hermes Airports
Status: Closed 12 May 2006
Description: Eu622 million financing for the 25-year BOT concession refurbishing and operating Larnaka and Pafos airports
Sponsors: Bouygues Bâtiment International (22%), Egis Projects (20%), Cyprus Trading Corporation (11.3%), Hellenic Mining (11.3%), Vancouver Airport Services (11%), Aer Rianta International (11%), Iacovou Brothers Construction (5.7%), Charilaos Apostolides Public Ltd (5.7%), Nice-Côte d'Azur Chamber of Commerce and Industry (2%)
Lead arrangers: ING, RBS, SG, WestLB
Sponsor legal counsel: Norton Rose
Lender legal counsel: Freshfields
Government legal counsel: Pinsent Masons
Government financial adviser: PwC