Financing for the Santa Domingo-Samana toll road project in the Dominican Republic closed on February 28. The underwriter for Autopistas del Nordeste's $162 million bond issue is Morgan Stanley. The Multilateral Investment Guarantee Agency (MIGA) is providing the project with a partial political risk guarantee and MIGA's breach of contract coverage is the first to guarantee a capital market issue rather than a loan.

In addition, the project features a minimum revenue guarantee (MRG) from the Government of the Dominican Republic. Total project cost is estimated to be roughly $220 million. $60 million of the remainder will come from equity; the sponsors are providing $30 million in equity and the government is providing a further $30 million.

AdN, the project company, is a group of local and regional sponsors led by Colombian toll operator ODINSA. AdN was formed to hold a 30-year design-build-finance-operate concession – the country's first highway license. When complete, the road will link Santo Domingo to the northeastern Samana peninsula. The road is expected to lower transportation costs by reducing travel time between the sites and boost tourism-based development in the Samana peninsula.

The project has been in development since 1999, with Bancoldex, the Colombian export bank, initially in place as lead arranger and Colombian banks as participants. The structure fell through at the height of the Dominican economic crisis in 2003, as Colombian banks were not comfortable with the country risk.

Following the elections in 2004, and the establishment of Leonel Fernandez administration, the project was put back in progress. The restructuring involved altering the construction contract, which was adjustable in event of macroeconomic crisis. And originally the MRG was not very tight, although it would have been acceptable to a Colombian bank, if not US investors.

The concession's fundamentals look good – there is no alternative route to the area besides a 4.5-hour journey on a badly paved road, which is not open all year long. The new 106km road is 120km shorter, and will produce significantly greater savings in petrol than the tolls the users will pay.

The MRG, however, was the most important stimulus the project needed. The MRG is in dollars, and kicks in if revenues are not sufficient to repay the debt. But the MRG alone did not contribute much to the project's credit profile, since under many financial distress scenarios the government credit would deteriorate at the same time as the road's. At this point MIGA steps in – so the government guarantees minimum revenue to sponsors and lenders if there is no traffic, and MIGA then backs the government's guarantee.

MIGA's breach of contract coverage played a critical road in the project's execution. Yet the AdN toll road was MIGA'S first insurance policy for a project bond. MIGA sees this product as an opportunity to facilitate infrastructure investments in Latin America's emerging markets, especially in dealing with the aftermath of Argentina's default.

MIGA provided $108 million in political risk insurance for the road's development. The insurance covers 15% of the equity investment and 51% of the $162 million bond issue. It is MIGA's policy that when insuring debt a certain amount of equity must also be insured. The 51% figure was agreed on after early discussions with the buyers, and the insurance also protects the lenders until 2026 against risks such as convertibility and transferability restriction, expropriation, war and civil disturbance and breach of contract.

The $162 million in senior secured notes, maturing in 2026 with a 9.39% quarterly coupon, were the sole option in financing the project because in the Dominican market there is no 20-year debt available. Morgan Stanley (MS) was brought in during October 2005, largely because it led the restructuring of two series of outstanding external sovereign bonds of the Dominican Republic in early 2005.

From MS' perspective, MIGA'S involvement (and the involvement of the World Bank as an institution) was a major draw. In addition, MS considers the fact that construction risk is largely borne by the sponsoring construction companies to be a key strength in the deal. The concessionaire must deliver the road within 27 months of financial close. The source at Morgan Stanley adds the bond largely attracted credit hedge funds and emerging market funds.

Fitch assigned the deal a B rating – one notch above the sovereign ceiling for the Dominican Republic (B-). It cited the MIGA partial risk guarantee, AdN's financing structure and also the road's projected healthy financial performance. The Dominican Republic's sovereign rating encompasses weaknesses within the country such as poor public management, a fragile financial system, limited liquidity, energy sector crisis and also vulnerability to external shocks. These weaknesses, in Fitch's opinion, necessitated the need for MIGA's coverage.

According to Fitch, the MRG should compensate for shortfalls in toll revenues, but it notes that the government's history includes many fiscal lapses, and that in accordance with the concession agreement the MRG benefits from an unconditional letter of credit (LOC) from Banco de Reservas de la Republica Dominica (a state-owned financial institution). This feature should prevent the government from holding up payment of sums due under the MRG.

The road's traffic study was conducted by Auding and Cinesi, after which the Louis Berger Group (LBG) was brought in to audit the report and recommend changes. LBG's model is based on a route choice assignment model, and takes into consideration travel time, vehicle operating costs and toll costs. Fitch raised questions concerning the traffic forecasts, since they relied on a relatively small data set. However, from an investor's point of view the MRG mitigates much of the traffic risk in the event of the study not holding up.

The Dominican Republic's recent macroeconomic crisis highlights the value of such enhancement products as the PRG. Astris Finance sees this deal as an important template for future deals, particularly for countries which are economically weak with greater credit risk. A project with a country rating such as B- or even lower could be enhanced to BBB or higher, when it benefits from a robust financing structure and significant risk protection such as MIGA's.

Autopistas del Nordeste
Status: Closed 28 February
Size: $220 million
Location: Dominican Republic
Description: Construction of a toll road linking Santo Domingo with the Samana peninsula
Sponsors: ODINSA, ODINSA Holding, Grodco, Grodco Panama, Remix and CBCC
Underwriter: Morgan Stanley
Financial adviser: Astris Finance
Issuer's legal cousel: Hunton and Williams
Underwriter's legal counsel: Davis, Polk and Wardwell
Traffic consultant: Auding and Cinesi
Traffic auditor: Louis Berger Group