Last year was the year that large volume Turkish privatization and PFI concessions really got underway – Turk Telecom, Tupras, Erdemir and Telsim, for example, and Esenboga Airport, Galataport, Inspection of Motor Vehicles on the PFI side. And the year ended with the lease extension on the original Ataturk Airport concession, a deal that has pushed the envelope on the size and tenor of private Turkish concessions.

The Ataturk concession was originally tendered and awarded in 1997. The tender for the new lease agreement was scheduled to take place in March 2005 but was delayed for legal reasons until 10 June, when the General Directorate of the State Airport Authority (DHMI) shortlisted three companies.

Of the three participants, the incumbent concession holder, TAV HI, offered the best price of $2.54 billion plus VAT (roughly $3 billion in total) and was awarded a lease contract to refurbish and operate the international and domestic terminals, the multi-storey car park and the general aviation terminal for 15.5 years.

The deal is substantial – the largest ever privatization project accomplished in the aviation industry, and one of the largest privatizations of 2005 across all industries in Turkey.

As per the tender specifications, a new company, TAV Havalimanlarý Terminal Isletmeciligi A.S. (TAV), 98% of which is owned by TAV HI, has been established to operate all of the terminals and the car park. The lease contract was signed on 16 June 2005 between TAV and DHMI and became effective as of 3 July 2005 until 2 January 2021.

TAV HI

TAV HI was established in 1997 by Tepe Construction, Akfen Construction and Airport Consultants Vienna as Tepe Akfen Vie Investment Construction and Operation Co. after being awarded the build-operate-transfer (BOT) tender for the Istanbul New International Terminal and multi-storey car park. Since October 2005, TAV HI has been renamed TAV Havalimalarý Isletme A.S.

TAV HI has managed to develop many ongoing projects in the aviation sector, both in Turkey and abroad. In Turkey it has been awarded the concession to operate and construct new terminals in Ankara Esenboga Airport and Izmir Adnan Menderes Airport. Abroad, TAV HI will be constructing new terminals in Cairo, Egypt and Tblisi, Georgia and operate the terminal in Tblisi for 15.5 years. TAV HI has also acquired HAVAS Ground Handling Co and recently prequalified for the Haji Terminal BOT Project.

The original lease financing

As per the lease contract executed between TAV and DHMI, TAV will pay DHMI a total amount of $2.543 billion plus value added tax (VAT) in instalments (lease payments) as follows:
a) 2.5% of the aggregate lease payment was payable on the date of the execution of the lease agreement;
b) 5% of the aggregate lease payment was payable within five business days following 3 July 2005;
c) 15.5% of the aggregate lease payment is payable within 180 days following 3 July 2005 (i.e. by 30 December 2005); and
d) 5.5% of the aggregate lease payment is payable within five business days of the beginning of each subsequent operation year, starting with the operation year commencing on 3 January 2007 (each subsequent operation year starts on 3 January at 00:01 in the relevant year and ends on 2 January at 24:00 in the next year). The final lease payment is scheduled to be made within five business days of 3 January 2020. (It should be noted that the project company is investigating whether VAT paid on the lease payments is recoverable (and if so to what extent)).
The lease payments from 2006 onwards (around $140 million plus VAT per year) will be paid by revenues generated by TAV. But the lease payments made in 2005 (an aggregate of $690 million) had to be financed.
The first payment of around $75 million, representing 2.5% of the total concession price, was paid on 16 June 2005 by TAV to DHMI. The funds were provided by Garanti Bank as a bridge loan. Following this initial payment, an additional $150 million had to be paid as of 7 July 2005. Consequently, Garanti Bank arranged a facility of $360 million on a project finance basis, restructuring the bridge facility as part of the package. The 10-year deal was the longest tenor provided by a Turkish bank to a private company to date.
According to the facility agreement signed between TAV and Garanti Bank on 6 July 2005, the bridge loan was restructured as a Tranche A facility. For the $150 million payment to be made to DHMI on 7 July 2005, Garanti Bank granted TAV a second loan of $75 million as a Tranche B facility – the remaining part of the payment was funded by WestLB as a bridge loan to complete the transfer of operating rights. A further Tranche C facility of $195 million remained as a commitment until 31 December 2005, to be used – subject to the results of due diligence- for the third installment payment to be made to DHMI.

After the transfer of operating rights completed in July 2005, Garanti Bank and Hypovereinsbank (HVB) were appointed mandated lead arrangers (MLAs) by TAV to structure, arrange, and underwrite another project finance package supporting the lease contract. Clifford Chance (Frankfurt) acted as international legal counsel and Eryürekli & Fidan Law Office as local legal counsel. The complexity of the project also required a high level of due diligence to be completed in a short period of time with the support of a technical and insurance advisers, and model auditor. These services were provided by Mott Macdonald as technical, traffic, and environmental adviser; Miller Services London as the insurance adviser; and PricewaterhouseCoopers as the model auditor.

The total financing required was $715 million, which needed to be made available before the end of 2005. For this purpose, the facility agreement dated 6 July 2005 was amended and restated, and this loan agreement was signed on 9 December 2005 by Garanti Bank, HVB and TAV.

The amended financing structure

The $715 million financing comprises a $660 million commercial facility, $15 million in working capital and a $40 million mezzanine facility. With the new amended and restated facility agreement, Garanti Bank shared the commercial and working capital facilities with HVB equally, with a commitment of $337.5 million each. HVB was sole provider for the $40 million mezzanine.

Taking into account the revenue stream, and with the purpose of reducing the cost of political risk insurance and currency hedging, the deal was structured in dollars and euros with Tranche A denominated in dollars with an amount of $180 million, Tranche B, denominated in Euro with a Euro equivalent amount of $480 million, and Tranche C, denominated in Euro, with an amount of $15 million (working capital facility). The size of the dollar tranche reflects the amount of debt that can be serviced using revenues paid directly into an offshore account by non-Turkish airlines.

As per the new tranching structure, Garanti Bank's previously funded $150 million has been transferred to HVB by way of novation, and Garanti Bank provided Euro equivalent of $330 million under Tranche B of the new deal. Furthermore, the bridge loan facility provided by WestLB has been refinanced by the commercial facility. The remaining amount was used to pay the lease payment to be made at the end of 2005.

The facilities have a legal tenor of 10 years with an average maturity of 6.73 years as a result of a sculpted repayment schedule. Margin on the commercial tranches is 250bp.

The debt to equity ratio is 85:15. Financial covenants include standard DSCR-linked dividend lock-up and default triggers, 6-month debt service reserve account, yearly lease payment reserve account, maintenance reserve account, refurbishment reserve account (for the refurbishment work to be completed until the end of 2006 as per the lease contract) as well as a cash sweep mechanism reducing the tenor in the base case.

Under the amended financing, Garanti Bank and HVB share the security package for the previous Garanti Bank facilities. The onshore security package consists of an assignment of receivables (i.e. receivables and claims as per the lease contract, revenue agreements, material subcontracts, letters of guarantee as well as the proceeds under the primary insurances), a pledge of the shares of TAV, a pledge over the onshore accounts and security granted by the shareholders of TAV over receivables under any shareholder loan granted by any of them to TAV. The offshore security package consists of a Luxemburg law pledge over the offshore accounts, an English law assignment of the reinsurances, and an English law assignment of TAV's rights under the hedging documents.

Project challenges

One of the biggest challenges for the project was to meet the due date for the lease payment for end-December 2005 and to meet the 60-day due diligence schedule.

A principal due diligence item for an airport project is traffic risk. When compared with global and European airports, Ataturk airport was displaying low traffic growth until 2003 due to a number of factors, amongst which were:
a) Political and economic instability in Turkey, for instance the currency devaluation in 2001;
b) Over-regulation of the domestic and international air transport market in Turkey;
c) Natural disasters, such as the 1999 earthquake.
However, due to deregulation of the domestic air transport sector and increasing economic and political stability in 2004-2005, there was a remarkable improvement in the passenger numbers. For the coming years, a growth in number of passengers is expected as a result of:
a) An increase in the number of international passengers because of EU Accession, which is increasing the importance of Istanbul as a trade and commercial center and meeting point for different political and business occasions.
b) An increase in domestic passengers as a result of the deregulation of domestic air services, and an increase in the GDP rate, which will ultimately affect the income level of domestic passengers, who will be more inclined to use air transportation for their leisure activity.

There is no minimum passenger guarantee provided by DHMI, but the financial structure, with a number of built-in assumed external shocks, provides traffic risk protection.

Like most BOT-style concessions, the termination provisions in the Lease Contract are weak and cannot be relieved by the related provisions of Turkish Law. However, given the excellent track record and strong position of the sponsors, the MLAs are comfortable with the control mechanism and structure built in the financing documentation. In addition, time lag provisions before termination provided for different event of default cases, which give some comfort to the lenders as the time lag provided is remarkable enough to correct the situation leading to event of default.

The financing relies on an offshore account structure and hard currency revenues received from the major international airlines to decrease the cost of political risk insurance. The remaining risk is to be covered through private PRI. Foreign exchange risk is mitigated by a substantial part of revenues being paid in hard currency. In addition, cross-currency hedging will provide protection against fluctuations in the currency markets.

Syndication

The project has the outstanding characteristic of being the largest loan granted to the Turkish private sector by domestic and international banks. Many banks have stated an intention to take part in syndication. Due to the tight timetable, syndication has been delayed until this year.

Conclusion

Istanbul Ataturk Airport has become a benchmark for the Turkish project finance market. A growing number of project finance lenders will follow the deal into the Turkish market given the sizeable privatization projects and other transactions in the Turkish project pipeline. Furthermore, given the increasing stability of the Turkish economy and its high growth rates, there is increasing competition in the Turkish financing market as international banks increase their interest. This trend will likely lead to longer tenors with tighter margins in the very near future.