By joining the mandated lead arranger group on Equate 2, Banco Santander, in April, followed BBVA into a region that has traditionally been alien territory for Spanish banks. The Kuwaiti petrochemical project is Santander's first Middle Eastern venture – a key milestone as it seeks to establish itself as a major player in project finance beyond its core markets of Spain and Latin America.

"To play in the big leagues, you have to diversify portfolios," says Pablo Lastra, the banker who led Santander's efforts on Equate 2. The bank has signalled its commitment to the region by becoming one of the deal's bookrunners should a general syndication be required, although this is probably just symbolic, since that would be an unlikely option for a project with a 34-strong MLA group.

Santander, BBVA, and Caja Madrid are also among the mandated lead arrangers on the $3.8 billion Indiana Toll Road project in the US, where their strong relationship with Cintra helped them bag one of the most attractive PPP concessions on the global market. That Caja Madrid, previously a major force only in the Iberian peninsula, is playing such a prominent role on ITR is a sure sign that Spanish banks are looking to new foreign markets for deal flow to bolster lower volume business and margins in their traditionally strong domestic market.

Foreign inroads

It is in transport infrastructure that Spanish banks and sponsors have made the greatest inroads abroad. The Spanish PPP model has developed so successfully in Spain, on the back of road concessions, that there is almost guaranteed to be at least one Spanish sponsor bidding on all road projects tendered in Europe or the US and, to a lesser extent, Canada.

The latest European deal to select a preferred bidder is the Eu1.3 billion ($1.68 billion) Ionia Odos real toll project in Greece, which will be awarded to Cintra/Ferrovial, subject to judicial processes. Santander, BBVA and Fortis are backing the consortium. The 30-year concession, for the upgrade and new build of 177km of motorway, is the largest of six Greek real toll concessions. If the debt prices at 120bp over Euribor as expected – roughly the margins on the preceding Maliakos Kleidi project – it will offer Spanish lenders some respite from the extremely low margins on offer in Spain.

In the US, Cintra, in tandem with Macquarie Infrastructure Group (MIG), has grabbed a headstart on the US domestic competition for toll road projects by tapping European relationship banks familiar with PPP structures and with immense appetite for project debt.

The consortium won the 99-year Chicago Skyway concession in 2004 with a $1.83 billion bid, backed by $1.19 billion of project debt provided exclusively by European banks. A refinancing followed quickly in the 144A bond market, managed by Citigroup and Goldman Sachs.

But when the same Cintra/Macquarie team won the Indiana Toll Road concession, again notable for the lack of US names in the seven-bank MLA group, it underlined the advantage Spain has in the fledgling US PPP market.
Cintra's main Spanish rivals are also active in the US, and will hope some of the upcoming road concessions come their way. Dragados and FCC head two of the three shortlisted consortiums for the Miami Tunnel project (the third is a pairing of Bouygues and ABN Amro), and the former, along with Cintra, is keenly eyeing developments in Texas.

As well as in the US and Greece, Cintra has also enjoyed recent success in Italy, where at the end of last year it became the first foreign sponsor to be awarded a major PPP contract – the Eu943.8 million Cremona-Mantua real toll motorway, a 55-year design-build-finance-operate (DBFO) concession. Santander is advising Cintra's consortium, but under Italian law the financing does not have to be in place before a PPP concession is signed, and Cintra is taking its time over the appointment of MLAs for the deal.

Protectionism?

Spanish sponsors also initially looked set to dominate the recent wave of French toll road privatizations, but in the end only one, Abertis, won out. The French government rejected Cintra's bid for its stake in APRR. It chose instead to sell its 70% stake to a partnership of Eiffage and Macquarie for Eu6.9 billion, despite the fact that Cintra was said to have made the largest offer.

Politics is thought to have played a big part in that decision; with a backlash in the French press and public opinion against the majority of the roads ending up in Spanish hands, Cintra may have done better if it had taken a leaf out of Macquarie's book and teamed up with a French partner. Nevertheless, Spain still did well out of the sales, since Barcelona-based operator Abertis was successful in its Eu4 billion bid for the government's 75.7% stake in Sanef.

More recently, on 24 April plans were unveiled for a merger between Abertis and Autostrade of Italy (the other losing bidder for APRR) which would create the world's largest motorway operator. Although billed as a merger rather than a takeover, facilitated by a share swap, the new company will have its headquarters in Spain and some Italian politicians are already opposing the deal.

Protectionism could also yet put the brakes on the Spanish expansion in the US, as politicians on Capitol Hill threaten to introduce legislation restricting foreign ownership of certain critical infrastructure.

But one country that has traditionally welcomed foreign investment is the UK, and whether Ferrovial succeeds with its takeover bid for BAA will likely hinge on its ability to make an offer good enough to entice BAA's shareholders to accept. If BAA does end up in Spanish hands, it will give Ferrovial control not just of Heathrow airport, along with some other major British terminals, but also an important foothold in east and central Europe, via Budapest airport, which BAA owns.

Bank boom

All this activity by Spanish construction companies is good news for the country's banks, which have been called upon to provide much of the financing. Almost all of Cintra's overseas ventures have seen both Santander and BBVA involved. These two banks are also arranging the roughly Eu230 million debt for Ireland's M25 Waterford Bypass project sponsored by Dragados, which awarded in April.

At the end of last year, BBVA started a project finance team in Paris to follow developments in the French market, the roads sector in particular. Although Cintra missed out on the APRR acquisition, BBVA was one of the five mandated lead arrangers for Eiffage and Maquarie's Eu7.65 billion acquisition facility. The bank also committed at the sub-underwriting phase to Vinci's acquisition financing of ASF.

BBVA also made a strategic decision to become active in the Middle East two years ago, and has already been an MLA on projects that include Qatargas 2, Oman LNG and Q-Chem 2, before getting involved in Equate 2. Interestingly, Caja Madrid also joined Qatargas 2 as a participating bank.

Santander's involvement in Equate 2 is part of a wider strategy it calls the Atlantic Project, which has the objective of strengthening wholesale banking operations outside its core markets of Spain and Latin America. In the oil and gas sector, it is looking at seven or eight projects outside those markets, including LNG regas terminals in the US.

The foreign jaunts of Caja Madrid and La Caixa bear witness to the depth of resources of Spain's cajas de ahorros – regional savings banks. These have been a pillar of the domestic project finance market, frequently found on deals in either a lending capacity or as equity providers, and have grown into formidable lenders: The 2005 Dealogic League Tables (search March 2006 issue at www.projectfinancemagazine.com) ranked Caja Madrid fourth globally by volume as a mandated lead arranger of PPP loans, and third as a mandated arranger of all European project finance loans. The same tables also attributed to La Caixa the biggest ranking climbs both as a provider and as an arranger of project finance loans globally.

La Caixa will likely see a further strengthening of its position in the project finance market if Abertis's merger with Autostrade goes ahead. The Catalan bank is one of Abertis's major shareholders – it is common for Spanish banks to own stakes in sponsors – and was one of the MLAs for the Sanef acquisition financing.

Rude health

That Spanish companies are showing such global ambition is testament to the maturity of the domestic market.
After years in which the Spanish PPP market was largely preoccupied with infrastructure projects, this year saw the country's first hospital PPPs reach financial close. With healthcare providing one of the mainstays of the UK's PFI system, the Eu300 million Majadahonda and the Eu138 million Vallecas projects could be described as a rite of passage for Spanish PPP, which has now reached full maturity.

But, like the UK, pricing on these first deals is incredibly low. Majadahonda starts at 75bp over Euribor during construction, when there is a completion guarantee in place, rising to between 95bp and 115bp while the hospital is in operation. Vallecas is priced even lower, starting at 60bp, although it has a different guarantee structure. By offering margins in line with those currently available for hospitals in the UK – where pricing has fallen down to these levels after years of doing deals – the lenders to these projects are giving themselves little room for error.

Santander was the financial adviser and sole lead arranger to the Ploder-led consortium sponsoring the Vallecas project. When it first closed, many project finance bankers in Spain felt the pricing was too low, especially since Ploder is not one of the country's leading construction companies.

Nevertheless, Santander managed raise eyebrows by syndicating the deal before Majadahonda – the takers were KfW, IKB, Banesto and four cajas de ahorros. It is now in a strong position in the fledgling hospital PPP market as it is also the financial adviser and sole lead arranger on the Eu275 million Burgos hospital in Castille-Leon, the first project outside Madrid to reach the preferred bidder stage.

The Eu75 million Arganda del Rey project, sponsored by FCC, OHL and Caja Madrid, could be the next to close and is expected in late May or early June. Caja Madrid is the sole MLA for the Eu63 million debt, which will have a 27.5-year tenor.

The other four Madrid projects should close in the coming months, while a decision is due at the end next month on a preferred bidder for Spain's biggest hospital deal to date, the Eu780 million Son Dureta hospital in Palma de Majorca.

With many projects tendered at the regional level, with less strong central government guidance than is the case in the UK, a key characteristic of Spanish PPP has become its diversity. This sometimes leads to projects following routes that would be anomalous in the UK – for example, the Toledo hospital will be tendered on the Calle-30 model, with the regional government retaining a majority stake in the project company.

Such innovation has been seen in the past on water projects, such as last year's Eu1 billion Segarra Garrigues in Catalonia, and more major water programmes are in the pipeline.

The Eu3 billion Acuamed scheme is an umbrella for smaller projects centred around the construction of seven desalination planst in Valencia and Murcia, two of Europe's most arid regions. The first of these, a Eu82 million desalination plant in Almeria, was tendered at the end of April and two more followed in May – a Eu267 million plant in Aguilas and a Eu373 million plant in Torrevieja, which will be Europe's largest.

Another water project is being considered in northern Spain, in the Navarra region, and will entail building a water corridor from east to west across the region. It is still unclear exactly how much the project will cost.

Roads keep rolling

In the roads sector, Banesto Caixa Geral and HBoS have just closed the Sacyr-sponsored AS-18, setting an important benchmark for shadow tolls. Margins on the Eu128.8 million deal range from 80bp to 110bp.

The switch to shadow toll concessions came about with Spain's last change of government two years ago, and the AS-18 to close ahead of many projects currently in the pipeline, which Spain's regional governments are tendering.

Spain's Ministry for Public Works will add to this pipeline in the summer when it launches a Eu2-4 billion programme to upgrade the country's existing expressways. The roads will be tendered under 16 separate 20-year concessions.

Before the shadows started rolling out, real tolls had dominated the PPP market, culminating in the landmark financing of Calle-30 last year, in which prices bottomed out at 35bp over Euribor for the senior debt.

One of the reasons why margins on that deal were so low was that 80% of the SPV is publicly owned. Nevertheless, sponsors on some earlier deals might be tempted to refinance, potentially shaving around 40bp off deals that had initially priced at 120bp.

The Pamplona-Logrono, or Autovia del Camino, shadow toll, which initially closed in May 2004, will be refinanced in the coming weeks. The lenders on the deal will remain unchanged, with XL Capital Assurance – already involved in an EIB segment of the existing debt – wrapping the remainder to give the project margins that could well be in the region of 50bp all in.

Yet it is unlikely there will be a rush of refinancings following Autovia del Camino. Since interest rates in Spain have been coming down in recent years, most projects would stand to lose any gains on the swaps. Whether it would make sense to refinance a deal would depend on how extensively the swaps are used on that given deal and how rigidly they are applied.

But the domestic pipeline is not enough to satiate the huge appetite of Spanish banks. Although projects such as the Indiana Toll Road and Equate 2 do not offer margins significantly higher than at home, they do offer volume and new markets to grow in.

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Clean, green, but pricing's mean

Despite very low lending margins, wind power remains the workhorse of project finance in Spain's energy sector.

This summer will see the second largest ever portfolio financing close, and the solar power sector looks set to take off on the back of an extremely generous regulatory regime that underscores Spain's determination to lead the way in clean fuel technology.

Nevertheless, these power sources, solar power especially, constitute a relatively small part of Spain's overall energy mix. The biggest potential pipeline is in combined-cycle gas turbines – a sector in which project finance has failed to take off in Spain – where expansion will mostly be funded on-balance sheet.

In August 2005, the government set new targets for the expansion of the country's renewable capacity by 2010. Previously the objective was 13,000MW, but with installed wind capacity currently standing at just over 10,000MW, this target was increased to 20,155MW, or 12.1% of overall energy needs. The target for solar photovoltaic energy is to have 400MW installed by 2010.

In June, Energias Renovables Mediterraneas (RENOMAR) is due to close a significant portfolio financing. Eight banks – Banesto, BBVA, Caja Madrid, RBS, Banco Sabadell, Santander, Société General and Calyon – have already provided a Eu320 million ($387 million) bridge loan to Acciona Energia, acting in consortium with local investors, for its 800MW portfolio of 21 wind farms located in Valencia. The project, which is expected to close before the summer with a total of Eu1 billion debt, will be the second largest wind portfolio financing ever, after the 1,173MW EEE portfolio in 2001.

Pricing on the debt will vary according to coverage ratios, but on the average DSCR of 1.3x it will pay a margin of 75bp over Euribor. This is higher than on the 199MW ERRM portfolio, that last year set a new benchmark for low margins on Spanish wind deals – 60bp at cover ratios of 1.3x – though the price on that deal partly reflected the strength of Iberdrola as a sponsor. The RENOMAR debt will have a tenor of 18 years.

With pricing plumbing such low depths, some bankers in Spain have decided that wind projects are no longer worthwhile and claim they will no longer finance them.

A large part of the reason why prices are so low is that Spain has an extremely generous feed-in tariff regime in place to encourage developers to help the country meet its targets on renewable energy. These subsidies are even more generous for solar energy than they are for wind. The cost of a megawatt of installed solar thermal capacity is in the region of Eu5-Eu6 million compared to Eu1-Eu1.5 million for wind.

As such, when the Eu300 million Andasol 50MW solar thermal project closes in June, debt pricing is likely to be competitive with wind power; the margin on last year's 11MW Sanlucar was 110bp over Euribor, since when prices have fallen steadily across the board in project finance. Mandated lead arrangers Banco Sabadell, BNP Paribas, Dexia and WestLB are offering long tenors of over 15 year to Andasol's sponsor, ACS Cobra, for the plant, located in Guadix, Andalusia.

While project finance bankers cannot hide from the prevailing climate of low margins, those that previously specialised in financing wind projects are keenly embracing solar power as a means of broadening their portfolios, making funds available to even small and medium sized investors.

This is what is happening in the photovoltaic solar power sector, where a loophole in Spain's tariff regime offers plants smaller than 100kW an extraordinarily high fixed tariff for the first 25 years of operation, worth 575% of what consumers pay at present. By way of contrast, solar thermal plants and photovoltaic plants larger than 100kW receive 300%, while wind farms receive 80% to 90%.

Such plants are too small to fund using project finance, but clusters of them, known as huertos solares (solar gardens), are springing up as methods are devised to tap into their potential before 31 December 2007. Companies are rushing to have the plants in place by that date, as premiums for plants built afterwards could be smaller if the government closes the loophole.

BP Solar and Santander announced at the end of April the largest photovoltaic project in Spain, with a total investment of Eu160 million. By 2008, BP will build 278 small installations with a total capacity of 18MW to 25MW as a turnkey contractor, while Santander will deal with private investors that have expressed an interest in the plants.

But these projects represent a drop in the ocean compared to the scale of investment Spain needs over the coming years to keep up with increases in the demand for energy. With the moratorium on nuclear energy likely to continue and hydro power vulnerable to periods of low rainfall, most power companies in Spain are looking to increase their CCGT capacity given the current climate in favour of low carbon emissions.

However, in the past Spanish power developers have preferred to finance these on-balance sheet due to the mismatch between the pool power price and the price of gas. The only two IPPs in Spain are foreign owned, and project financing new CCGT plants only seems likely to happen where the sponsor is not Spanish.

Ireland's ESB refinanced Bizkaia Energia, one of Spain's two IPPs, late last year, achieving significant savings of around 70bp. Spain's only major CCGT project financing in the foreseeable future could be a refinancing of the other IPP, AES's Cartagena project, which was financed in 2003 with a mini-perm, making it ripe for a refinancing this year or next.