Love or hate the pricing, but 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.

At 35bp over Euribor – the average pricing across both A and B tranches – the deal was expected to have trouble finding takers. It did not. 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.

The total project cost is around Eu4.5 billion ($5.4 billion) in two phases – Phase 1 funding the southern ring and Phase 2 the northern. If the project is fully realised it will set a new volume record for Spanish public-private-partnership (PPP) deals.

The Phase 1 financing comprises a Eu1.35 billion 30-year tranche A loan backed by the fixed-price repayment stream of 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.

Separately, the deal also features a Eu114 million subordinated loan to partially back the private sector sponsors' equity stakes. Banesto, Fortis and Royal Bank of Scotland backed the Ferrovial/ACS bid and, although unconfirmed, are thought to have put up the sub-debt.

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 Ayuntamiento de Madrid (Madrid City Council) debt. Alternatively, some bankers view the deal as too low to be worth participating in – even given the massive liquidity and increasingly tight project debt pricing in Spain.

What is certain is that for the private sector sponsors it is a very good deal and in terms of return for lenders, 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, has closed at just 65bp over Euribor on an eight-year tenor. In that context, 35bp for municipal flavour debt does not look bad and with the potential for repeat business on Phase 2, even better.

However, because the deal has been deemed on-balance sheet by both the Spanish authorities and Eurostat, the benefits to Madrid are not as polished as originally expected, and on a pure funding level – and discounting the efficiency savings of having private sector sponsors running the project – the deal could have been done at a cheaper cost of borrowing as straight public debt.

Calle 30 is 80% owned by the Ayuntamiento de Madrid and 20% by Ferrovial, ACS Dragados and API Conservacion (an ACS affiliate) 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 original idea was that with the project company taking construction and availability risks for the 35-year term, the risk transfer equation would comply with Eurostat requirements for getting the debt off the public balance sheet.

Although the concept always looked to be on shaky ground, rumour in the market is that the deal may have ultimately been the victim of Spanish politics. Madrid town hall is run by the Conservative party while central government is Socialist. Rumour suggests that the balance sheet treatment issue was brought to Eurostat's attention in an act of political one-upmanship.

Either way, Calle 30 is no longer the off-balance sheet template that some in the market had hoped for and speculation is that Phase 2 may be funded through traditional public borrowing.

Nevertheless, the financing has got a major infrastructure project off the ground relatively quickly. Although some banks gripe at the pricing, because of the way the deal is structured, it compensates lenders since they only have to account for the percentage equivalent of their take of 20% of the total project risk. In short – whatever happens to the project, lenders are on a winner.

Regional roads go shadow

Calle 30 is just one in a wave of Spanish local and regional roads projects that are coming to market – the majority in shadow toll form.

In September the Comunidad Autonomia del Principado Asturias awarded a Sacyr-led consortium a 35-year concession for the 20km Eu125 million AS18 Oviedo-Gijon. Banesto and Caixa Geral are lead arrangers, along with HBoS, on Eu100 million of project debt to support the shadow ball concession, which is expected to reach financial close in 2006.

A Sacyr subsidiary, Itinere, along with Secosa and Construcciones Nacares, has also won the Eu450 million 59km CV35 shadow toll in Valencia. The 35-year concession will be built in two phases – the second in 2016 – and although at the preliminary financing stages, the sponsors have appointed Caixa Geral (Caixa Banco de Investimento) and HBoS as leads along with Banesto.

Cedinsa, a consortium led by FCC has been selected as the preferred bidder for a Eu70 million concession to develop a road in Catalonia linking Macanet de la Selva and Playa d'Aro. The consortium, which also includes Comsa, Copicsa and Copisa, has received bank offers during the bidding stage but has yet to mandate.

And the EIB has confirmed plans to lend Eu60 million to the Comunidad Autonoma de Galicia to help it fund its part of the Eu120 million Santiago-Brion shadow toll awarded to Dragados.

More deals are in the pipeline. Bids were due in on 18 November for the C-14 project near Reus in Catalonia, and submissions went in for two concessions linking Valladolid-Segovia (the CL-600 and CL-603 in the Castilla Leon Region) on 21 October.

Why Spain is going the shadow toll route is hard to fathom. There is a general shift away from shadow tolling to real toll concessions across Europe, and Portugal, the first to adopt shadow tolling in a big way, has found itself unable to afford payments on its shadow toll programme.

Even the UK – a longstanding user of DBFO/PFI schemes for roads but resolutely anti-toll (other than the Birmingham Northern Relief Road) – looks set to adopt the real toll mantra with the government's new Transport Innovation Fund designed to promote toll road projects at the regional level.

Arguably it is political pressure that is sending Spain down the local shadow toll route – real tolls do not have local voter appeal and shadows are deemed a fairer spread of the financial burden. In addition, for many roads real toll economics do not stack up. However, rates of return and the cost of borrowing are falling in Spain, making more real tolls a viable proposition, and consensus among bankers is that the shadow/real toll choice should be based on the economic viability of individual projects rather than political considerations.

Road refinancings

Since debt margins have continued to fall, a number of road deals are coming back to market for cheaper money and refinancings will be a bigger chunk of Spanish project business next year.

The ENA refinancing – which closed on December 12 – has significantly reduced Sacyr's cost of borrowing. The original deal closed in October 2003, when Sacyr raised Eu1.6 billion to buy ENA through a two-tier structure – one part to fund the holding company and the second for the concession companies. The package featured a Eu1.2 billion seven-year term loan to acquire the holding company, priced at 170bp for the first five years then rising to 190bp, and a Eu400 million seven-year revolving credit for the concession companies' debt priced at 145bp.

The new deal – Eu1.248 billion of eight-year debt – has come in at 65bp. And despite the low margin the facility has pulled in 11 mandated lead arrangers (MLAs): Fortis (bookrunner), Banesto (bookrunner), SCH (bookrunner), Royal Bank of Scotland (bookrunner), Helaba, SG, ING, La Caixa, Banco di Roma, Banco Sabadell and MCC. Fortis made the best offer for the MLA mandate and Sacyr then asked the other bidders to join at the same price.

The original deal was always intended to be refinanced in year five when the margin rose 20bp. But Sacyr has managed to go back to the bank market in just 2.5 years and save itself around 100bp on the original debt.

With margins so low in Spain, and many of the original road financings structured as miniperms (normally designed for refinancing after a maximum of six years), more refinancings are already in the pipeline.

The Autopista del Sol is expected to be in the refi market in the second half of next year, along with Radiale 2. Sol will be looking for cheaper debt. Radiale 2 will be looking for a solution to steer it away from financial.

Financed in 2002 through a Eu440 million 21-year facility arranged by BBVA, Banesto and Caja Madrid, the FCC-sponsored road was the first Radiale to come to market. The project has not suffered from expensive debt – just bad design.

R2 has been built at such a distance from the existing population that much of the traffic continues to use the old congested free routes. As urban development catches up the road is expected to get financially healthier over time. But for the moment Radiale 2 is in danger of going bankrupt and a number of banks are looking at the problem. Any solution will probably feature debt refinancing and a longer concession period.

More bonds

A number of the forthcoming refinancings are expected to be wrapped bond deals, although with the price of project debt so tight, the cost of a wrap may begin to outweigh the benefit.

Calyon and Ahorro Corporacion (ACF) are in the market with an XL-wrapped refinancing of the FCC-sponsored Eu375 million Autovia del Camino shadow toll which closed in 2004. Originally structured by the same arrangers and intended as a bond deal, the project was the first publicly rated Spanish toll road. The road is in construction and expected to be fully operational in 2007.

The original deal featured a Eu175 million XL-wrapped EIB loan, so the new deal features no extension of quality risk for the monoline. The new deal will feature a slightly bigger commercial bank tranche. The increase is backed by an inflation linked index on the shadow toll payments that has already increased the income stream above expected levels, and which will kick in once the road is operational. Consequently the loan can be expanded while retaining the original cover ratios. The tenor on the deal is also going to be slightly lengthened beyond the original 21 years.

The regional government has yet to approve the deal, but it will likely happen in the first quarter of 2006. Banks in the original syndicate – ICO, SCH, Dexia, La Caixa, BBVA and a host of regional cajas – are expected to roll into the new deal.

Although margins are tight at home, the volume of refinancings and shadow tolls should keep the Spanish roads project pipeline buoyant. But the coming year will also likely see Spain becoming the biggest European exporter of public-private-partnerships (PPP).

Spanish sponsors are making a big push abroad into toll roads. Abertis has just won one of the privatised French toll road operators and is also bidding for the Indiana toll road in the US, Cintra/Ferrovial is bidding for the Indiana toll road and Dulles, and Dragados is shortlisted for the I-635 in Texas.

Spanish advisors are also exporting PPP expertise – Asesores de Infraestructuras is collaborating with consultancy JPA in advising Florida DoT on a potential Eu1.5 billion PPP tunnel project.

In short – the Americas is about to witness the second coming of the conquistadors – albeit in hard hats, pin stripe suits and with a hunger for roads.