Financing for the second phase of the Segarra Garrigues irrigation project – conceived under Spain's original National Hydrographic Plan and the biggest infrastructure project in Catalonia to date – closed at the beginning of July.

Structured over the past three years by Caja Madrid, Dexia Sabadell, BBVA and La Caixa, the deal is a complex financing based on the sale by a special purpose company to lenders of future credit rights backed by a fully owned company of the Catalan government – in effect a future flow deal backed by state government IOUs that have not been issued yet.

Sponsored by Aigues del Segarra Garrigues (ASG) – a consortium comprising FCC (24%), ACSA AGBAR Construccion (22%), Copcisa (21%), Copisa (20%) and various local contractors (13%) – the future flow financing funds construction of a secondary irrigation network in the province of Lerida (Lleida in Catalan) in central Catalonia, which when completed will irrigate about 70,000 ha of land.

Financing for phase 1 of the project – the Canal Primario Segarra Garrigues, the main channel from the Segarra river that will supply water to the secondary network – closed in late 2003. Sponsored by CASEGA (ultimately 100% Spanish government owned) and structured by Caja Madrid, the Eu445 million project comprised Eu222 million in government lending with the remainder coming from the community of farmers that use the water. The 12-year project debt totalled Eu115 million and was syndicated among 18 domestic banks.

Phase 2 incorporates more than 150 projects across 15 sectors with a construction period of around 10-11 years. Each project will take around 12-18 months to complete and multiple projects will be underway at the same time. Total phase 2 cost is Eu1.071 billion which includes VAT, cost of financing and construction costs.

The scheme is underpinned by a 30-year contract between ASG and Regs del Segarra Guarrigues SA (REGSEGA) – a company fully owned by the Generalitat de Catalonia – under which ASG will build, operate and maintain the project.

Construction will be in different phases and, following each phase's completion, ASG will receive credit rights from REGSEGA. Those credit rights accrue over 20 years and are partially amortized each year on 31 December by a fixed predetermined annual payment by REGSEGA to ASG. At the end of 20 years the difference between the sum of REGSEGA annual payments and the sum of the credit rights is paid off by one last REGSEGA payment.

Financing for the project involves the sale of the credit rights to the banks in return for advance construction funds – with 150 projects on the go, the deal is effectively an umbrella for 150 German method financings.
Financial advisors, Caja Madrid and Dexia Sabadell, were joined by BBVA and La Caixa to act as MLAs. Banco Sabadell joined the group as participant. The banks have bought Eu884.5 million of the credit rights – equivalent to the total cost of construction to be assumed by REGSEGA (the rest will be assumed by the farmers).

Participations of each bank in the Frame Agreement are 25% for BBVA, Caja Madrid and La Caixa, 20% Dexia Sabadell and 5% Banco Sabadell. Given the amortization profile of the credit rights, the maximum outstanding risk will be around Eu520 million. There are no plans at the moment to syndicate the deal further.

Debt pricing is at different rates during construction and post-construction and although pricing details have not been released, at least one element of the facility pays a margin of 130bp over Euribor.

With the project indirectly backed by the Catalan government and featuring FCC as lead sponsor, the deal is a comfortable proposition for lenders. However, the banks are taking on revolving construction risk as each of the 150 projects starts and finishes. Each project will be constructed by a sole contractor (any of the sponsors), which will be determined by ASG right before the start of the construction of the project.

Because the banks are buying credit rights before the rights have been issued, the deal features contractor-sponsor guarantees during the construction phase. It is only post-construction that REGSEGA assumes the obligation to pay the sponsors and hence bank repayment is assured.

To guarantee bank repayment should a contractor fail to meet the maximum termination date on any given project (set by the banks), the contractor is forced to buy back the credit right for that project from the banks. Each project will be solely guaranteed by its contractor – there are no cross guarantees from the other sponsors.

But this solution in turn presented further problems. Sponsors on the deal range from Spanish construction heavyweight FCC, through to medium-size developers like Copisa, down to local Lerida contractors. The main difficulties in the structuring process arose when determining the maximum credit risk acceptable for each of the potential sponsor-contractor.

Getting the grantee risk allocation negotiated proved a long process for both sponsor and lender legal counsel – Uria y Menedez and Garrigues respectively. Bases have been set for the maximum risk that the banks will assume from each contractor/developer and a range of different sponsor guarantees have been put in place that relate to the ability to pay and means of each sponsor.

ASG is effectively a public-private-partnership (PPP) and appears to have all the hallmarks of being a good deal for Catalonia. Both construction and operating risk are passed to the private sector thereby putting the deal off the regional government's balance sheet. In addition, repayments are predetermined, annual and staggered over 20 years, and therefore allow for long-term budgeting and require little administration cost.

Aigues del Segarra Garrigues
Status: Financial close July 2005
Description: Credit rights purchase that funds construction of second phase of Segarra Guarrigues irrigation project.
Total debt: Eu884.5 million
Sponsors: FCC; ACSA AGBAR Construccion; Copcisa; Copisa; local contractors
Financial advisors: Caja Madrid; Dexia Sabadell
Lead Arrangers: Caja Madrid, Dexia Sabadell, BBVA; La Caixa
Participant lender: Banco Sabadell
Legal counsel to sponsors: Uria y Menendez
Legal counsel to lenders: Garrigues