Calle 30: PPP on a grand scale

Syndication of Phase 1 of Madrid's flagship ringroad project, Calle 30, closed on 13 December with 14 banks, including the mandated lead arrangers, participating.

The deal is the biggest PPP in Spain to date, the first major PPP by a town hall as opposed to a regional government, and although the final structure was not what was originally anticipated, the financing has got a major infrastructure project off the ground that might otherwise have dragged on.

Calle 30 is 80% owned by the Ayuntamiento de Madrid (Madrid City Council) and 20% by Ferrovial, ACS Dragados and API Conservacion through special purpose company Empresa Mantenimiento y Explotacion M-30 (EME M-30). The overall project company – Madrid Calle 30 – is responsible for remodelling and upgrading the M30 orbital, which although originally a ring road has been overtaken by urbanisation. The 35-year service contract will involve both road widening and extension and tunnelling. The total project cost is upward of Eu4.5 billion in two phases – Phase 1 funding the southern ring and Phase 2 the northern: the phase 2 deal will probably launch late 2007.

The Phase 1 financing comprises a Eu1.35 billion 30-year tranche A loan backed by a fixed price repayment stream under the concession service contract, and a Eu1.15 billion 20-year B tranche linked to performance risk, since payments from the municipality may be subject to deductions for under-performance.

In addition to providing new funding, the financing took out the Eu400 million bridge facility underwritten earlier in the year by Caja Madrid, SG and Dexia, that funded the payment of works already undertaken.

Separately, the deal also features a Eu114 million subordinated loan to partially back the private sector sponsors' equity stake. Banesto, Fortis and Royal Bank of Scotland backed the Ferrovial/ACS bid and put up the sub-debt – rumoured to be priced at 150bp over Euribor.

The senior facilities priced at 35bp over Euribor – the average across both A and B tranches – and although PPP margins have fallen dramatically in Spain, Calle 30 was still expected to have trouble finding takers. It didn't. Joining mandated lead arrangers Caja Madrid, Societe Generale and Dexia Sabadell are Instituto de Credito Oficial (also mandated lead arranger on tranche A only); joint lead arrangers BBVA, La Caixa, Bank Nederlandse Gemeenten and Banca OPI; Helaba with lead arranger status; and at arranger level Caixa Galicia, Lloyds TSB, Caixa Catalunya, IKB Deutsche Industriebank, and Ibercaja.

There is no middle opinion on Calle 30 pricing – arguably it is good reward for very little lender risk and way above the 10bp arrangers would normally get for Ayuntamineto de Madrid (Madrid City Council) debt. Alternatively, some bankers viewed the deal as too low to be worth participating in – even given the massive liquidity and increasingly tight project debt pricing trends in Spain.

What is certain is that for the private sector sponsors it is a very good deal and in terms of pricing, needs to be looked at in the context of the whole market. For example, Sacyr's ENA acquisition facility refinanced the day before close of syndication on Calle 30. First closed in 2003 at a debt average of 165bp over Euribor, in just 2.5 years Sacyr has managed to go back to the bank market and get Eu1.248 billion of debt refinanced at 65bp on an eight year tenor – saving itself 100bp on the original debt.

In that context, 35bp for municipal flavour debt does not look bad – albeit the tenor is much larger.

But the Calle 30 story is more than just cost of funding. The deal started as a unique financial structuring that might have been a new off-balance sheet template for future Spanish local government deals.

Unfortunately the final deal is on-balance sheet. Rumour in the market is that the project has been the victim of Spanish politics. Madrid town hall is run by the Conservative party (PP) while central government is Socialist. Speculation is that the deal was brought to Eurostat's attention by an act of political one-upmanship.

True or not, it is hard to argue that Calle 30 should be off-balance sheet with the Ayuntamiento owning 80% of the project vehicle and the projct featuring a typical Spanish RPA (project termination payment) under which Madrid must pay for the works if the project is cancelled.

But the failure to get off-balance sheet treatment aside, Calle 30 is a significant deal for the Spanish PPP market and the combined fixed/performance risk structure may yet be repeated on the upcoming Toledo Hospital scheme – albeit with minor tweaking: Toledo will be a rental contract so that in case of termination, theoretically the project will not revert to the state and therefore the deal has greater risk transfer while retaining the ability to attract debt at around the same pricing as Calle 30.

Calle 30
Status: Closed 13 December 2005
Description: Phase 1 PPP financing for Madrid ringroad
Size: Phase 1 Eu2.5 billion
Sponsors: Municipality of Madrid, Ferrovial Servicios, Dragados, API Conservacion
Mandated lead arrangers: Dexia Sabadell Banco Local, Societe Generale CIB, Caja Madrid, Instituto de Credito Oficial (Tranche A)
Joint lead arrangers: BBVA, la Caixa, Bank Nederlanse Gemeenten, Banca OPI
Lead arranger: Landesbank Hessen-Thüringen Girozentrale
Arrangers: Caixa Galicia, Lloyds TSB, Caixa Catalunya, IKB Deutsche Industriebank, Ibercaja
Sponsor legal counsel: Garrigues (Madrid); Uria y Menendez (private sponsors)
Lender legal counsel: Clifford Chance