ASG: Rights of sale

Spain's National Hydrographic Plan has spawned several massive irrigation schemes. The Canal Secundario Segarra Garrigues project has offered policy makers and developers an elegant solution to the problem of financing them.

The deal is worth Eu1.071 billion ($1.27 billion) and incorporates over 150 projects, each to be built by one of 11 different sponsors. It is the biggest infrastructure project in Catalonia to date and took over three years to structure.

The main challenge was getting all participants comfortable with the risks on a project whose sponsors range from construction giant FCC to small local contractors like J.A. Romero Polo – all doing their own thing across many mini-projects.

The project is the second phase of a two-phased plan. The first phase – Canal Primario Segarra Garrigues – involves the construction of the main canal between Segarra and Garrigues, due for completion in 2009, in the province of Lleida. It closed in 2003 and is sponsored by CASEGA, a company that is ultimately state-owned. Caja Madrid structured the Eu445 million project, which comprised Eu222 million in government lending; Eu115 million project debt, with a 12-year tenor, which was syndicated among 18 domestic banks; and equity provided by the community of farmers that use the water.

Phase two, which closed in July 2005, involves building the secondary distribution network of the Segarra-Garrigues canal and will include 40,000 km of canals. In its entirety, the scheme will supply 18,000 irrigation outlets and 70,000 hectares.

Canal Secundario is sponsored by the Aigues del Segarra Garrigues (ASG) consortium led by FCC (24%), Acsa Agbar Construccion (22%), Copcisa (21%) and Copisa (20%). The remaining 13% accrues to: Benito Arno, Aridos Roma, Constructora de Calaf, J.A. Romero Polo, Sorea, Aqualia (an FCC subsidiary) and M.i.J. Gruas. ASG won the concession ahead of competition from a group led by Dragados, Comsa, Sacyr and Corsan-Corviam.

Together, the sponsors will provide Eu186.5 million of equity, while the remainder of the financing comprises Eu884.5 million debt. The debt is underwritten by Caja Madrid and Dexia Sabadell, which acted as financial advisers, and BBVA and La Caixa, which joined the other two as mandated lead arrangers. Each bank's take was Eu221.1 million, except for Dexia Sabadell, which holds Eu176.9 million after selling Eu44.2 million to Banco Sabadell. There are no plans for further syndication.

The 150-plus projects involved in phase two are spread across 15 sectors over a total construction period of around 10 to 11 years. Each project will take 12 to 18 months to complete, with multiple projects taking place at any given time. The total cost of the project, Eu1.071 billion, includes construction costs, VAT and the cost of financing.

The key to financing the project is the sale of future credit rights. The project is underpinned by a 30-year contract between ASG and Regs Segarra Garrigues (REGSEGA), a company fully owned by the Generalitat de Catalonia. Under the contract, ASG will build, operate and maintain the project, with construction taking place in phases. Following completion of each separate part of the project, ASG will receive credit rights from REGSEGA corresponding to that part. These will be amortized over 20 year by a fixed annual payment from REGSEGA.

The credit rights are sold by ASG to the lenders before they have even been issued. The proceeds from the sale of future credit rights will cover the construction costs of the project. If ASG fails to complete any part of the project on time, the sponsor responsible – which is determined by ASG right before the start of the work – has to buy back the credit rights for that part from the lender.

Because the banks are buying credit rights before the rights have been issued, the deal features contractor-sponsor guarantees during the construction phase – it is only post-construction that REGSEGA assumes the obligation to pay the sponsors and bank repayment is assured. Each project will be solely guaranteed by its contractor without cross guarantees from other members of the consortium.

The solution brought its own set of problems. The main difficulty was in determining the maximum credit risk acceptable for each of the potential sponsor-contractors, which varied greatly according to their size.
The risk allocation process proved a long one for both sponsor and lender legal counsel. Bases were set for the maximum risk that the banks would assume for each contractor and a range of different sponsor guarantees were put in place relating to each sponsor's means and ability to pay.

Given the large number of projects involved and the lack of cross guarantees between members of the consortium, the deal more closely resembles a collection of PPP projects sharing the same documents and lenders. Such an umbrella has the benefit of increasing economies of scale and making project financing a workable option for such a large and complex scheme. Given the amortization profile of the credit rights, the maximum outstanding risk for the banks will be around Eu520 million – but the phased construction means they are exposed to rolling construction risk for 12 years.

Aigues del Segarra Garrigues
Status: Financial close July 2005
Description: Credit rights purchase that funds construction of second phase of Segarra Guarrigues irrigation project.
Total debt: Eu884.5 million
Sponsors: FCC; ACSA AGBAR Construccion; Copcisa; Copisa; local contractors
Financial advisors: Caja Madrid, Dexia Sabadell
Lead Arrangers: Caja Madrid, Dexia Sabadell, BBVA; La Caixa
Participant lender: Banco Sabadell
Legal counsel to sponsors: Uria y Menendez
Legal counsel to lenders: Garrigues