OHL's financing for its Los Andes concession is the largest and longest-dated deal ever syndicated in Chile's bank market. It shows that banks can compete with wrapped bond solutions on large road financings. Furthermore, it shows that they can become comfortable with taking traffic risk on infrastructure projects.

While the ability to recycle bank debt in the capital markets is usually taken as a sign of maturity in a country's financial sector, Chile's banks have been marginal players in the development of its infrastructure. Banks have, by and large, been confined to putting together smaller deals, as well as those that rely on revenues from government.

In 2005, however, banks have become increasingly competitive. Towards the end of 2004, Spanish development bank ICO cofinanced the Vespucio Sur concession alongside bond investors. And in November, Banco de Chile beat out competition from XL Capital for the mandate to refinance Bancomext's ITATA and Aconcagua concessions.

Los Andes is a concession to construct, maintain and operate a 92.3km stretch of the Ruta 60 CH, which runs east to west from the Argentinean border to Valparaiso, Chile's main port on the Pacific Ocean. It carries traffic from Argentina, but more particularly freight from the north of Chile to Valparaiso for export. The concession consists of a mixture of upgrading and new sections, designed to handle predicted traffic growth.

The concession in fact runs in two sections, which are separated by a stretch of the Ruta 5 – Chile's main north-south route. Its general course follows the Aconcagua river, as well as a railway that formerly carried traffic over the Andes. But the two sections are very different – the 38.4km part nearest Valparaiso is likely to draw heavily traffic (75% of total traffic, while the 53.8km section further north and east is quieter.

OHL Concesiones won the bid for the concession, awarded by the Chilean Ministry of Public Works (MOP) in early 2003. The project was delayed, however, when the route of the road had to be changed to accommodate the wishes of local communities. This led to a Convenio Complementario, an agreement with the MOP for additional works, which brought the final financing requirement is $434 million in debt and equity.

The sponsor ran a competition in early 2005 to select a funding route, and had eliminated a monoline-wrapped solution by March. It appointed Santander and BBVA as lead arrangers. According to Pablo Ybanez, chief of analysis and project finance at OHL in Madrid, the banks offered competitive terms and a better adaptation to a project that was under construction.

The banks, however, took a little time to warm to the UF11.9 million (Chile's inflation indexed version of the Peso, equivalent to $381 million) financing, and ultimately the delay in the concession, and the increased costs, made the project much more bankable. The additional work required by the change in route will be funded through a subsidy from the MOP, which will be paid over the life of the concession.

These payments, known as resoluciones, are monetized upfront through a seven-year bank loan of UF5.99 million. This facility, which resembles the facility that Santander extended to the Vespucio Sur concession, is one reason why the Chilean banks can be comfortable with the Los Andes concession.

The remainder of the debt is a 20-year, UF5.3 million loan, on which lenders take full traffic risk, and in which they participate pro rata with the resoluciones facility. The 20-yar tenor achieved on the debt is a considerable first, and will make it difficult for a bond/monoline solution to compete in future.

There are some elements of the deal that illustrate the distance that the banks still have to go to become a natural choice of a sponsor. The financing syndicated to Banco del Estado de Chile, as arranger, Banco BICE, ABN Amro, Banco de Credito e Inversiones and Banco Security, all as participants. This group encompassed essentially every bank in the country with infrastructure appetite, and according to the lead arrangers imposed "a strong pressure for a clean and understandable structure." Searching for a compromise on every deal will not necessarily put pressure on costs on future deals, however.

The other significant challenge was securing an interest rate swap to convert the long-dated debt, in variable rate pesos, into fixed rate UF. Some of the debt, the element secured on the resoluciones, did not require a swap, but the remainder required the leads to go out into a relatively illiquid market for Pesos and contract for fixed rate UF.
The deal closed on 16 December, and capped a year in which monolines were effectively frozen from the market. Earlier in 2005, Santander issued a 10-year, $120 million uncovered bond issue backed by government subsidies to Vinci for a prison construction programme.

Monolines still have appetite for Chile, although it has slid down their list of priorities. And 2005 has been a year of exceptionally low interest rates, which has made alternative solutions very attractive. If the country's economy becomes a little rockier, then the certainty provided by a wrap will become more attractive. In the mean time, however, the country's hospital programme, and its more esoteric transport projects, will be natural homes for bank lenders.

Sociedad Concesionaria Autopista Los Andes
Status: Closed 16 December 2005
Size: UF13.6 million ($434.6 million)
Location: Chile
Description: Concession for two-section stretch of Ruta 60, with a total length of 92.3km
Sponsor: OHL Concesiones
Debt: UF11.9 million
Equity: UF1.7 million
Mandated lead arrangers: Santander, BBVA
Sponsor legal adviser: Chadwick & Aldunate
Lender legal advisers: Uria & Menendez (Spanish law), Cariola Diez Perez-Cotapos & Cia (Chilean law)
Independent engineer: Arze Recine y Asociados
Traffic auditor: Steer Davies Gleave
Traffic adviser: TRASA
Insurance adviser: AON Chile
Auditor: Deloitte