The M6 Duna bond refinancing – the first wrapped infrastructure bond in Central and Eastern Europe (CEE) – has more than halved the original cost of borrowing for the Hungarian road project's sponsors.

The Eu412 million refinancing achieved an all-in price of less than 50bp over Euribor – very low given that it is a financial first for the region. Margins on the original financing, which closed in December 2004, were in the 115bp-124bp range.

Sponsored by Bilfinger Berger (40%), PORR (40%) and Swietelsky International Baugesellschaft (20%), M6 Duna is a 22-year DBFO concession (extendible by a further 11 years) for a 58.6km stretch of motorway starting south of Budapest, near Erdi, and ending near Dunaujvaros. The road is scheduled for completion in September 2006.

With the certainty of project revenue in the form of monthly availability payments the road was always a prime candidate for refinancing post-construction. The refinancing comprises Eu212 million of bonds wrapped by FSA from investment grade to triple-A and a wrapped EIB loan.

Dexia lead arranged the private bond issue, which was oversubscribed and priced at 27bp over Euribor. Dexia also provided a Eu19 million debt service reserve letter of credit and interest rate swaps guaranteed by FSA.

The EIB provided a Eu200 million loan, also wrapped by FSA, which priced even lower than the bonds. The EIB debt is due in 2024 while the bonds will mature on 31 March 2025.

The EBRD also participated in the deal: the bank lent Eu32 million to the original financing and bought the same amount in notes on the refinancing.

"We ran a good competition for the arranger mandate and the monoline wrap," says Frank Schramm, finance director at Bilfinger Berger. "But we were also a bit lucky with the timing as there was a lot of liquidity and people desperate for deals."

It had been the intention of the sponsors when they originally financed that a refi would follow quickly. BNP Paribas acted as financial advisers for the sponsors on both the original deal and the refinancing, while the MLAs on the original were BayernLB, Commerzbank, KBC, K&H Bank, KfW and Hungarian Foreign Trade Bank.

Just months after syndication signed on the original financing, the sponsors and BNP started the process of refinancing and invited offers from all four monolines and all the banks active in the region. The options considered were exhaustive, including wrapped debt and an unwrapped bond issue.

Although Dexia and FSA were chosen through different competitive processes, the pairing of two institutions from the same group helped speed the process to a fairly swift conclusion. This was important to the sponsors who were keen to get the refinancing completed before Hungary's elections in April.

Although an unusually severe winter contributed to the project missing its March interim completion date, the deal benefits from sound economics. There is no traffic risk involved and the project is led by a strong sponsor – Bilfinger Berger. The project's average DSCR is 1.23x while the minimum is 1.20x.

The project was a boon for public coffers as well as for the sponsors because under the terms of the concession, refinancing gains have to be shared equally between concessionaire and state.

The deal is a clear signal that now is a good time for countries in CEE to be launching PPP programmes to take advantage of the immense liquidity in the bank market. But this lesson seems to be lost on many of the region's governments, including Hungary's, some of which are turning away from PPP just when it is becoming cheaper than ever.

Financiers hope the deal will reverse a trend away from PPP in Hungary. Last year the incumbent Socialist government decided to fund the construction of future road projects, including phase two of the M6, through the state-owned motorway operator AAK. As Niall Murray, head of project finance at KBC (one of the MLAs on the initial M6 financing) says: "Hungary has gone full circle from being against PPP, to being fully committed, to looking at more traditional forms of finance once more".

But a return to pure public procurement is not a certainty despite the anti-PPP political agenda. Eurostat ruled at the end of last year that borrowing by AAK to finance road construction would classify as on balance sheet government spending, and this has raised the possibility that Hungary may once again turn to PPP.

For the moment, the market is in limbo as the country awaits the outcome of an election this month. A win by the opposition (Fidesz) would not bode well for a resurgence of PPP given one of Fidesz's campaign promises is to keep healthcare and transport infrastructure in state hands.

Hungary is not alone in CEE in its anti-PPP stance – the Polish government is also hostile to PPP. But the Czech Republic views PPP favourably and plans to launch a series of projects, including a Eu500 million rail link to Prague's airport. These projects are still in their infancy, however, and are unlikely to close before mid-2007 at the earliest.

M6 Duna Refinancing
Status: Closed March 2006
Size: Eu412 million
Location: Erdi to Dunaujvaros, Hungary
Sponsors: Bilfinger Berger (40%), PORR (40%) and Swietelsky International Baugesellschaft (20%)
Bookrunner: Dexia
Monoline: FSA
Financial adviser borrowers: BNP Paribas
Financial adviser state: ING
Borrower legal: Freshfields
Lender legal: Clifford Chance
State legal: Linklaters