The W1.45 trillion ($1.4 billion) Incheon Bridge project, the first developer-led rather than construction company-led project in South Korea, has reached financial close.

At 12km, the bridge will be the longest bridge in South Korea and the fifth largest in the world and will link Incheon Airport with the Incheon Free Economic Zone and southern Seoul. The project company, Korea Development Company (Koda), is building the asset and has signed a concession document with Incheon City giving it the right to maintain and operate the bridge until 2039.

The principal investor is Macquarie Bank, via Incheon Bridge Investment Company (IBIC), a 100% subsidiary of the bank. IBIC is purchasing a 41% stake in the Koda project for a total consideration of W67.5 billion. Macquarie joins the initial shareholders in Koda: Kookmin Bank (15%), Industrial Bank of Korea (15%), AMEC (23%) and Incheon Metropolitan City (6%).

Debt finance for the project totals W732.7 billion ($703 million) and consists of a W578 billion, 19-year senior debt portion, and a 21-year, W154.7 billion sub debt portion. W164.6 billion of the total project cost comes from the equity portion. Syndication of both debt tranches is complete.

Kookmin and IBK each took W150 billion of the senior loan amount, with IBIC committing to W188 billion. The lead banks syndicated a further W90 billion to three domestic life insurance companies, Kyobo Life Insurance, Samsung Life Insurance and Korea Life Insurance. Each insurance company took W30 billion.

According to Donghyo Yoo, an arranger at the Investment Banking Department at Kookmin Bank, the senior debt carries an interest rate of 8.0% during construction and then 190bp over the three year AA- rated, non-guaranteed corporate bond. Loan tenor is 19 years, including a five-year grace period. Fees details were not revealed. According to a source at AMEC, standard financial guarantees are in place for the construction phase.

The subordinated loan carriers a fixed interest rate of 12% during the construction phase, transferring to 600bp over the three year AA- rated, non-guaranteed corporate bond, once the bridge is operational. The loan tenor is 21 years, including a 14.5 year grace period and 6.5 years of repayment.
For the subordinated loan, both Kookmin and IBK committed to W32.7 billion, while IBIC tool W89.4 billion.

The Korean government is also putting up a subsidy that is expected to come in at around W770 billion depending on inflation.

Kookmin Bank and Industrial Bank of Korea led the debt financing, with Kookmin the security agent and agent bank. HSBC acted as financial adviser to AMEC Investment and developed the financing and project model. A source at AMEC says strong appetite in the bank market and speed of execution prompted the sponsors to choose a local bank market financing. While there are likely to be opportunities to refinance the transaction in Korea's debt capital market, bankers close to the deal say this option does not form part of the funding strategy, at this stage.

The project is being developed as a Korean public-private-partnership (PPP). As such it from benefits a capital grant from and a minimum revenue guarantee (MRG) from the Korean government set at 80% of the revenue levels agreed in the concession agreement.

The MRG support reduces slightly over the life of the concession and this level of support is lower than the traditional 90% MRG for similar transport PPPs in Korea. But, as John Walker, CEO of Shinhan Macquarie Financial Advisory, notes: "it is probably one of the last projects to have this level of government support." Over the last few years, the government has reduced both the duration and scale of the MRG.

According to the project terms agreed to by the government, should the actual traffic revenue be less than the 80% of the forecast amount at the end of each year, then the government will provide a cash subsidy to the project company. In the event that the project company is not allowed to increase the toll, then the government is obliged to provide a subsidy to put the company in the position it would have been in had it escalated the toll.

According to Walker, Macquarie Bank became involved in the project after another investor pulled out. Although unconfirmed by Walker, the investor is believed to be National Pension Fund of Korea (NPFK), the country's largest pension fund. Walker would not discuss the reasons for the pension fund's withdrawal, but other market sources note that NPFK has also pulled out of other PPP project investments at the eleventh hour. "Its lost a lot of credibility in the infrastructure finance market as a result," says one banker.

"We only had four weeks to decide whether to invest in the project or not, but we already understood the dynamics very well as we are major investors in the road network which serves Incheon," says Walker. The strategic nature of the asset, and the strong government support also made the project attractive to the bank.

Macquarie may transfer the bridge asset into either MIG or its Korean Road Infrastructure Fund (KRIF) or sell it directly to institutional investors within the next six months. The bank is also understood to be in the final stages of preparing for the listing of KRIF and is seeking shareholder approval.

AMEC was the main player in the early project stages and was appointed potential concessionaire for the project in 2001. In 2002, AMEC and Incheon City agreed to jointly undertake the remaining design, project financing, environmental and traffic impact assessment studies. The two partners formed the project company shortly thereafter, with AMEC holding a $38 million stake (equal to 51%) in the special purpose company and Incheon City holding 49%. With the introduction of the other shareholders, AMEC's shareholding in the project company falls to 23%.

The heavy involvement of AMEC and Macquarie makes this project the first Korean PPP to be led by foreign investors. According to Yoo at Kookmin bank, AMEC developed and led the infrastructure project as a pure developer. Samsung, which is the design and construction contractor, is only involved in design and construction.

Construction of the bridge is underway and will be complete by October 2009.

Incheon Bridge
Status: Closed
Size: $1.4 billion
Location: South Korea
Description: Limited recourse financing for major bridge project
Sponsors: Macquarie Bank, Kookmin Bank, IBK, AMEC and Incheon Metropolitan City
EPC: Samsung Corporation
Lead arrangers: Kookmin Bank, Industrial Bank of Korea
Equity: W164.6 billion
Debt: W732.7 billion: senior debt W578 billion, subordinated debt W154.7 billion
Legal counsel to sponsors: Kim & Co
Legal counsel to the lender: Lee & Ko