The Korean Development Bank (KDB) has closed the KRW1.564 trillion ($1.58 billion) financing for the New Bundang Railroad project – the last big, unsolicited infrastructure project to include a minimum revenue guarantee (MRG) from the South Korean government. It closes a chapter in South Korea's Private Participation in Infrastructure (PPI) scheme, as new financing structures will need to be found to lure private capital.

New Bundang's sponsors form a wide consortium led by Doosan Industrial Development. The other members are Daelim Industrial, Daewoo, Dongbu Construction, Kolon, Taeyoung Construction, Posco, Korea Teachers' Credit Union, Kyobo Life Insurance and Korean Life Insurance Company.

The project – South Korea's second heavy rail PPI scheme after the Incheon International Airport Railroad (IIAR), which closed in 2004 – is a 35-year BTO concession proposed by Doosan in July 2002. It will consist of 19.3km of railroad with six stations, and will provide an alternative expressway between Seongnam and the Seoul metropolitan area, connecting with two existing subway lines.

Perhaps unsurprisingly given the size of the consortium, the project was delayed slightly by negotiations among the sponsors. But construction got underway in November 2005 and is scheduled for completion in 2010.

The railroad will intersect with the New Ansan railroad, which is expected to be financed in the next 18 months, to form an "X" through new suburbs that are being developed to accommodate Seoul's expansion.

KDB arranged the KRW747.3 billion debt, which consists of three separate tranches. The financing follows a template that has become standard for South Korean infrastructure projects.

The largest tranche is a KRW400 billion floating rate term loan with a 19-year tenor, including a five-year grace period. The loan is initially priced at 167bp over the one-year, AA- rated corporate bond rate. After the project becomes operational, margins will ratchet over the debt service coverage ratio.

This tranche mostly attracted banks. KDB kept KRW100 billion on its own books, while Woori Bank and Daegu Bank each underwrote KRW60 billion. Seven other institutions – including four banks, two insurance companies and a pension fund – also joined syndication, with stakes of between KRW10 billion and KRW40 billion.

There is also a KRW247.3 billion fixed rate loan that pays 7.9% interest over 20 years after a six-year grace period. This debt is held by Korea Life Insurance (KRW92.15 billion), Korea Teachers' Credit Union (KRW83 billion) and Kyobo Life Insurance (KRW82.150). These three insurance companies also provide 30% of the KRW206.1 billion equity injected into the project.

The third debt tranche is a six-year KRW100 billion stand-by facility to be provided by KDB. This facility will plug a gap during the early period of operation and enable the sponsors to meet loan repayments and operating costs during the project's early years.

The project also features a KRW717.6 billion government subsidy, which was increased from KRW561.1 billion.

Some lender protection is in place through a cash deficiency support (CDS) guarantee from the sponsors – making the project limited recourse. The IIAR project also featured a CDS, but the other major mass transit project to close in 2005, the Seoul Subway Line No 9, was fully non-recourse despite an otherwise similar structure. The total CDS for the New Bundang project is capped at KRW180 billion, with sponsors' individual liability determined pro-rata.

Also providing comfort for lenders is the MRG in place from the government, which ensures the project will receive 80% of projected revenues for the first five years of operation and 70% of revenues for the next five years. There is no guarantee beyond that.

Such generous support from the government has helped to ease the passage of past PPI projects towards financial close. The MRG for New Bundang is low by the standard of that enjoyed on the IIAR project – 90% for the entire 30 years of the concession.

New government policy, however, has significantly lowered the levels of support offered to PPI projects. In future, solicited projects will get 75% for the first five years and 65% for the next five years. Unsolicited projects – like the New Bundang Railroad, where the sponsor proposes a scheme and it is then made open to other bids if approved – will have no MRG.

Potentially this could make it difficult to finance future railroad projects. These projects incorporate a level of traffic risk that makes it difficult to attract cheap debt without strong government support mechanisms in place.

One way round this problem could be that future PPI projects break from their BTO and BOT mould and are run as build-lease-transfer (BLT) concessions instead. So far, BLT has only been used in South Korea for smaller accommodation projects, but Korean bankers say there is no reason why it can't be used for a railroad.

Even without the MRG, however, it is possible that some form of government support will be in place. A clearer picture will emerge of what this might look like after the New Ansan railroad finances. Led by Hanhwa Engineering & Construction, this is an unsolicited project so will not feature any MRG.

New Bundang Railroad
Status: Closed 22 December 2005
Size: KRW1.564 trillion ($1.58 billion)
Location: Kyunggi Province, South Korea
Sponsors: Doosan Industrial Development, Daelim Industrial, Daewoo, Dongbu Construction, Kolon, Taeyoung Construction, Posco, Korea Teachers' Credit Union, Kyobo Life Insurance and Korean Life Insurance Company
Debt: KRW747.3 billion debt
Equity: KRW206.1 billion
Lead arranger: Korean Development Bank
Legal adviser to the lender: Kim & Company
Legal adviser to the sponsor: Shin & Kim
Technical Consultant: Parsons Brinckerhoff Korea