The Spanish public private partnership (PPP) market is rapidly becoming a numbers game not unlike that of the UK – simply put, more deals but at lower volume and margin.

Deals sizes generally are smaller, margins are thinning due to excessive liquidity, the public sector is becoming more cost rather than added-value conscious, and Spanish sponsors are responding with more competitive bids and in turn demanding more competitive cost of funding from the banks.

Cost has clearly become the over-riding issue in successful PPP bidding since the majority of deal flow started coming from the regional/city governments.

In the bidding for the first of the Madrid hospitals – the 30-year Eu300 million (up front cost only) Majadahonda Hospital concession – the authorities took the unprecedented step of releasing nothing more than the annual payments from government to sponsor required by each bidder (for more details search Majadahonda on www.projectfinancemagazine.com). The lowest bidder – ACS Dragados/Bovis Lend Lease/Grupo Sufi with Eu44.5 million per year over the 30 year concession – eventually won, despite the fact that the annual unitary charge was supposed to account for just 40% weighting in the bid.

The message was clear – albeit too late for some of the bidders on the other hospitals because the preferred bidder for Majadahonda was not appointed until after the tender date for the Parla and Coslada hospitals.

The differences between the total prices bid on Majadahonda and Parla were Eu600 million and Eu200 million respectively over the 30 years, with the total price on each amounting to Eu1.2 billion and Eu414 million respectively.

The bidding has now come down to a more even spread with the bids on the remainder of the projects differing by Eu140 to Eu100 million on total price and with an average total price of around Eu500 million.

Hospitals programme tightly priced

Details on all eight hospitals bids are still sketchy and the final hospital – Valdemoro – has yet to appear in the market because it is being tendered under a different formula.

Sacyr has won the Eu80 million (up front cost only) Parla project and is rumoured to have also won the Eu80 million Coslada scheme after coming in with the lowest annual unitary charge. And although winners on the remaining four hospitals already tendered – the Eu98 million San Sebastian de los Reyes, the Eu100 million Vallecas Hospital and, the Eu40 million Arganda del Rey Hospital and the Eu50 million Hospital del Sureste – have yet to be announced, the cheapest known bids are as follows: Acciona with Crespo y Blasco has the lowest bid on San Sebastian de los Reyes and Ploder-Begar on Vallecas.

Finance pricing for the hospital programme is also only just beginning to emerge. Majadahonda features Eu270 million in 27-year debt lead arranged by Dexia Sabadell, Ahorro Corporacion (ACF) and ING Bank. The deal is priced at 100bp over Euribor dropping to 90bp over time. The pricing is on a par with UK healthcare PFI and therefore low given the length of the tenor and the fact that it is a Spanish first.

The Madrid deals are important because they are setting the benchmark for other regional and municipal projects – many of which are also turning to PPP.

Last year Barcelona awarded a tender for its Ciudad de la Justicia project (a new court complex comprising 11 new buildings): the 35-year concession is sponsored by FCC, Ferrovial, OHL and Emte with Banco Sabadell and SCH in the frame for debt provision.

The Generalitat de Catalunya has also established ICF Equipaments to promote PPP in schools, courts and municipal buildings with a mandate to pull in Eu296 million of projects in the coming year. And the governments of Castilla y Leon, La Rioja and Galicia are all also looking, or have looked, at hospital PPPs.

Road lenders also feel pinch

Despite the growing social infrastructure market the transport sector remains the biggest temperature gauge of Spanish PPP – and margins are also falling there with some bankers predicting sub-100bp pricing on a number of the regional shadow toll tenders expected in the coming months.

The lower margins are not only attributable to excess liquidity. Councils and municipalities are becoming more sophisticated in their use of PPP. What will probably be the biggest PPP in Spain to date – the Eu4.5 billion Calle 30 (Madrid ring-road) project – is firmly priced and structured as a municipal financing with enough project finance trappings to get the deal off-balance sheet.

The Ayuntamiento de Madrid (Madrid City Council) is currently tendering 20% of Calle 30 to private sector developers (for more details see Municipal news in this issue). After the appointment of the private sector partner, the new company – Madrid Calle 30 – will take on construction and availability risks for the project over 35 years. The repayment structure under the 35-year service contract comprises 60% fixed price and 40% linked to a range of performance criteria. The risk transfer equation is enough to meet Eurostat requirements for getting the debt off the city's balance sheet.

The arranger mandate for the Eu2.5 billion Phase 1 of Calle 30 has only recently been won by Dexia Credit Local with Caja Madrid and Societe Generale as co-MLAs. The deal is structured in two tranches: one Eu1.35 billion 30-year loan repaid by the fixed element, and a Eu1.15 billion 20-year tranche linked to the performance risk element.

The margin on the deals reflects the municipal risk and is said to be "very low" on everything but a small Eu150 million sub-debt tranche that is also to be included in the package.

Real tolls continue to roll

But margins on all road deals in Spain, irrespective of structuring, have fallen. The Ocana La Roda financing in late 2004 – the first of the four real tolls in Phase 2 of Spain's second national toll roads programme to finance – set the tone with a 8.5-year miniperm priced at a unbelievably flat 110bp over Euribor through both construction and operations (for more details search 'Ocana' on www.projectfinancemagazine.com).

More recent real tolls – Madrid-Toledo and Cartagena-Vera – have seen some recovery: Pricing on Madrid-Toledo ratchets on ADSCR, paying 140bp over Euribor on 1.4x to a minimum of 100bp at healthier coverages; and on Cartagena Vera pricing is an average 130bp over Euribor.

All three deals are too dissimilar to be truly comparable: Madrid-Toledo is a 27-year Eu400 million financing with medium-strength sponsors. Cartagena-Vera is a Eu450 million seven-year miniperm with strong sponsors but less than solid toll revenue expectations (for more details on boths deals see Transport news in this issue). And Ocana La Roda sold at the end of a six-month lull in the Spanish lending market and was thus able to tap into some major liquidity.

Nevertheless, and despite the lack of similarities, all three deals share a common element in their pricing – they all came in at least 20bp lower than envisaged in their original bids in early 2004 (for details of original bids see Transport news February 2004).

The fourth real toll – the Eu383 million Alicante semi-ring sponsored by ACS Dragados and Abertis – is expected to be in the syndication market in the next four weeks (although it may be held until September depending on lending conditions). Mandated lead arrangers Caja Madrid and La Caixa have been joined by BES.

What the deal prices at will be interesting given the bidding process for the 24.5km Alto de Las Pedrizas-Torremolinos real toll is expected to kick off in the same time-span according to some local bankers: the road is an extension to the Autopista del Sol and was one of the three remaining real toll concessions under Spain's second national toll road plan not tendered by the previous government in late 2003.

Shadows may go sub 100bp

The upcoming regional shadow tolls are expected to come in at sub-100bp given the dip in the more risky real toll sector.

The first publicly rated Spanish toll road – the Eu375 million 70km Autovia del Camino regional shadow toll linking the cities of Pamplona and Logrono in Navarre – closed last year.

Lead arranged by Calyon and Caja Navarra (Ahorro Corporacion), the deal featured Eu163.6 million in 21-year uncovered debt that priced at 90bp during construction (completion is forecast for April 2007) rising to 115bp until December 2010 and then 130bp for the following 7-8 years and 140bp thereafter and until commercial debt term in 2024. The deal also featured monoline wrapped EIB debt, but the uncovered debt gives an indication of what shadow pricing would have been a year ago had the new shadows appeared then.

The local governments of Asturias, Galicia and Valencia all have shadows in the market. The deals most likely to appear in the coming months are the M407 near Madrid; the Eu200 million CV35 in Valencia; the Eu40 million Via Rapida del Salnes and the Eu115 million Santiago-Brien in Galicia.
But with the real toll market down, the shadows pulling in an even broader range of bidders from the small and medium-size construction sector – M407 for example pulled in 14 bidding groups – and the possibility, as demonstrated in Autovia del Camino, of monoline wrapped EIB debt appearing regularly in the market, banks are going to have to look elsewhere for transport margins.

Foreign lenders still keen on Spanish sponsors

Despite the fall in Spanish pricing the roads sector is still fair game for foreign lenders in search of better margins than their own domestic markets or a solid portfolio spread. The influx of foreign banks into the market looks set to continue in the short term and most deals now feature a roughly 50/50 Spanish-foreign lender spread.

But the attraction is not only the domestic business. A number of the foreign banks are also courting the major Spanish sponsors many of which have longstanding, or are developing, strong links in new PPP markets in Latin America and the US.

For example, the majority of early Chilean infrastructure projects – the only developed PPP market in the Americas – were awarded to Spanish sponsors such as Ferrovial subsidiary Cintra in the case of the concession for the Santiago-Talca tranche of Route 5; ACS-Sacyr on the Santiago-Valparaíso/ Vina del Mar toll road; and a consortium led by Dragados (now a subsidiary of ACS) and FCC for the Santiago airport project.

That trend continues with Chilean road financings in the past two years for two Dragados-led concessions – Autopista Central and Vespucio Norte Express – Cintra's Autopista del Maipo refinancing and Autopista Vespucio Sur sponsored by Sacyr and Acciona.

The major Spanish sponsors already have diverse portfolios across European PPP markets and are now looking at opportunities in Brazil's new PPP programme (the first pilot deals for which are to be tendered in the coming months), the fledgling US market and Mexico.

Cintra has, against all the odds according to US banking sentiment last year, proved that PPP in the US is feasible – first with the $1.83 billion Chicago Skyway 99-year lease and second with its preferred bidder status on seven schemes (total value $7.2 billion) in the first phase of the Trans-Texas Corridor (TTC-35) (for more details on both deals search 'Cintra ' on wwww.projectfinancemagazine.com).

The move into the US seems to be paying off. Cintra is currently in the process of refinancing the Skyway deal in the bond markets where it is expected to up its ROI substantially, and has already got JP Morgan and PricewaterhouseCoopers on board with a view to approaching the bank market in late 2005 with the first of its TTC-35 projects.

If the good times in Spain's domestic PPP market are coming to an end the Spanish PPP export business looks set to keep bankers busy for some time to come. Similarly, if PPP takes off in the Spanish social infrastructure sector it may yet prove the setting for the first PPP secondary market outside the UK (a number of small independent boutiques have already set up shop in the municipal advisory sector). Spain has matured faster than any other PPP market and the Spanish PPP export business looks set to do the same.