Against the backdrop of arguments for and against Turkey's future EU accession (potentially scheduled for 2015), the Turkish economy is on its way to making debate defunct.

Turkey has increased political stability, made a remarkable recovery from its severe economic difficulties in 2001/ 2002 and shown itself to be a dynamic and growing market – particularly in the power, infrastructure, industrial and manufacturing sectors. The Turkish government is also involving the private sector in the development of key industry sectors. Slated for 2005 are a number of privatisations in the telecom, steel, port and energy sectors. All of these are in different stages of development and are attracting the interest of both foreign and domestic sponsors as well as international banks.

This year has also seen the award of a number of Turkish BOT-style concessions – the most significant being the 20-year concession for the country-wide inspection of motor vehicles awarded to TÜV TÜRK, a joint venture comprising leading Turkish companies Dogus, Akfen and the German corporate TÜV SÜD; and the recent 15-year concession extension for Istanbul airport awarded to TAV, a joint venture comprising leading local sponsors Tepe and Akfen.

Both deals have attracted a lot of attention from international banks and sponsors and are expected to reach financial close in late 2005. Both deals will also set benchmarks for the Turkish project market when they close. But both deals can also be traced back to the Eu178 million limited recourse financing for Ankara airport closed last month.

The successful close and syndication of this project has created a viable financing structure that accommodates both the various risk issues associated with the concession model and onshore financing in Turkey.

Project parameters

TAV Esenboga Yatýrým Yapým Ve Isletme A.S. (TAV) won the public tender to design, construct and operate a new international and domestic passenger terminal at Ankara Esenboga Airport in August 2004 and HVB was awarded the mandate to arrange the financing.

TAV comprises conglomerates Tepe Group and Akfen Group, who are predominantly active in the field of construction. In 1997 they were awarded the concession to construct and operate the new international terminal at Atatürk airport in Istanbul which they have been operating successfully since then.

The BOT style concession awarded by the Turkish State Airport Authority DHMI lasts for 18 years and 8 months and allows for up to 36 months construction. The airport is located 28 km north-east of Ankara and has good road links to the capital. Whilst the existing terminal buildings (A and B) are in a good state of repair, they date from the 1950s and have such capacity constraints at peak times that a temporary terminal (Terminal C) was developed to cater for charter flights. Terminal C has recently been demolished to provide space for the new terminal. The proposed project combines these three terminal buildings into a new passenger terminal with a combined international and domestic capacity of approximately 10 million passengers per annum to standards similar to those in Western Europe. Together with the 160,000m2 terminal building is a multi-storey car park and a 30 stand apron, of which 18 stands have contact gates.

The airport's primary users are Turkish citizens travelling within Turkey or on international travel, mainly to Germany. Ankara acts as an east-west transport hub for passengers travelling domestically in Turkey with the most important route being that to and from Istanbul, the country's commercial centre.

There is a range of challenges in financing concession-based projects in Turkey. The most pressing of these is the requirement under the tender for financing agreements to be in place within 90 days of award of the concession.

To meet this requirement, and based on experience gained through previous Turkish airport concession financings, a swift, high level due diligence exercise was conducted and a financing package was structured allowing TAV to sign the Concession on 18 November 2004: HVB was supported by Clifford Chance (international counsel, Frankfurt office), Pekin & Pekin (local counsel, Istanbul), Mott MacDonald (technical, traffic and environmental advisor), Miller Services (insurance advisor, London) and PWC (model auditor). Construction was able to commence immediately from sponsor sources in the knowledge that financing was secured, but allowing sufficient time to complete the outstanding project documents.

Financing structure

The ultimate Eu178 million financing package incorporates a Eu149.5 million commercial facility, a Eu28.5 million ECA covered facility and a Eu8.0 million working capital facility. The debt to equity ratio is 75:25.
Both the commercial and ECA facilities carry a legal tenor of 12 years leaving a concession tail of 6 years and 8 months. This tenor represents the longest tenor commercial lenders have accepted for a non-recourse project for local sponsors in Turkey.

Further details of the financing structure include an industry standard EPC contract backed by an L/C secured limited sponsor guarantee. Financial covenants include the standard DSCR linked dividend lock and default triggers, a maintenance and 6 month debt service reserve account as well as a cash sweep mechanism reducing the tenor in the base case. Lenders also benefit from a limited passenger shortfall guarantee from the DHMI. Margin pricing ranges from 325bps to 375bps over a margin grid differing between the construction and operation phase with step- ups over time.

Project challenges

A principal due diligence item for any airport project is traffic risk. With a country like Turkey, that has shown its GDP to be particularly elastic to shocks over the last years, a robust financing structure is essential. Lenders to Ankara airport benefit from cover ratios at around 1.6x as well as traffic projections with a number of built-in assumed external shocks.

A further fundamental element for international lenders to get comfortable with when lending to BOT-style concessions in Turkey is that these schemes typically pass a number of risks to the concessionaire that banks are more used to seeing allocated to the concession granting authority.

In particular, the Concessionaire and hence lenders are required to accept weaker termination provisions. In the Ankara project, banks take a high level of comfort from the excellent track record and strong standing of the leading local sponsors. In addition, substantial head room is built into the financing structure. Another Turkish concession related feature is the inability to assign the actual Concession agreement which leads to step-in-rights of the lenders into the various project contracts at the project level.

The market response to the Ankara deal shows a departure from the previous trend of commercial lenders requiring a substantial degree of commercial risk cover for onshore Turkish projects. Previous deals in Turkey have typically had a high level of ECA involvement or the involvement of multilaterals providing levels of commercial as well as political risk cover. These have, however, been transactions that have relied on government related entities for their future cash flow. The Ankara airport transaction, a straight traffic risk project, incorporates only 15% ECA cover. Although benefiting from a limited DHMI passenger shortfall guarantee, international lenders have focused their due diligence on the fundamentals supporting the deal's cash flows and only placed limited reliance on this structural element.

TAV's procurement plan consisted of various suppliers from different countries which made it necessary to appoint the general exporter Lincas, a subsidiary of Siemens. Through the involvement of Lincas supplies could be bundled and maximize the level of export volume that could obtain coverage from the German ECA provider Euler-Hermes on a project finance basis. This required a positive opinion from PWC which reviewed the transaction on behalf of Euler-Hermes.

To allow TAV to benefit from tax exemptions according to Turkish BOT legislation, Lincas had to conclude its contract not with the EPC contractor but with the TAV directly. To ring-fence the borrower from any completion/ supply risk arising out of this structure the EPC contract had to be adjusted accordingly acceptable to the lenders and the EPC contractor.

The other two sizeable concession style deals slated to close this year – TÜV TURK and Istanbul Airport – are also both volume risk projects with limited capex elements limiting the possibility of involving ECAs. The trend to more uncovered onshore commercial risk therefore looks set to continue.

Concerns over political risk remain with regards to convertibility and transfer risk. With its high degree of hard currency revenues received in an offshore escrow account from the major international airlines, lenders to the Ankara deal only required a limited portion of transfer risk to be covered through private PRI. The foreign exchange risk is strongly mitigated by the major part of revenues being paid in hard currencies.

Syndication

After close of the project documents in May 2005, syndication was launched to a select group of domestic and international banks as well as DFIs and successfully closed oversubscribed in July. Syndicate banks next to HVB comprise AK Bank, Garantibank, Halk Bank, DVB, National Bank of Greece, Caterpillar Finance, the French development bank Proparco and the Black Sea Trade and Development Bank.

Conclusion

Following the success of the Ankara Airport project, we expect a growing number of project finance lenders to follow given the sizeable transactions in the Turkish project pipeline. With concession lengths in the transportation sector hitting unprecedented lengths of up to 20 years, it will be interesting to see if tenors in future deals go out further. Given the currently more restricted tenor and higher margin thresholds of Turkish banks due to their credit ratings, we may soon experience international banks crowding out local banks from prestigious financing opportunities. Given the level of competition on projects in more established markets and the comparatively high yield opportunities in Turkey, this trend may set in faster than expected.

HVB has lead arranged four out of the six airport terminals that have been tendered as BOT concession projects in Turkey (Antalya (1998), Istanbul (1999), Dalaman (2004) and Ankara (2004/05)) and is mandated as Joint MLA for the $550 million TUV TURK Project (2005).