Vespucio Sur: First and last

Closed in November 2004, Vespucio Sur is the last significant Chilean urban toll road section to raise financing and the first to set two notable precedents: the first time the Chilean government's mecanismo de distribución de ingresos (MDI) has been applied to a newbuild concession, and the first time that a bank lender has co-financed a toll road alongside Chilean bond investors.

Lead arranged by Santander Central Hispano (SCH), insured by XL Capital Assurance, and co-financed by ICO of Spain, the $525 million UF21 million (Unidad de Fomento is an inflation-adjusted unit of the Chilean peso) multi tranche package comprises a discounted sale of UF11 million of resoluciones (payment obligations of the Chilean Ministry of Public Works), UF5 million in local bonds, a UF4 million ICO loan and a UF2.5 million VAT facility.

Vespucio Sur is sponsored by Sacyr and Acciona through Autopista Vespucio Sur (AVS). The consortium won the concession from the Chilean MOP (Ministry of Public Works) in 2001. The concession entails the expansion and rehabilitation of a 23.5km section of the road, which runs through the south of Santiago. The road has five sections and runs through nine municipalities, with 1.65 million inhabitants. Total project costs are around $670 million.

In December 2003, the MOP and the sponsors agreed to the inclusion of additional works in the concession. The most important of these is the extension of the City Metro Line 4, for which the concession holder must build seven new stations and the track, which runs between the two sides of the motorway.

The new agreement also calls for the inclusion of a rainwater collection system, one designed for the benefit of the city at large, but which is likely to improve conditions of the road.

These new works basically doubled the cost of the project, and led to difficult negotiations with the MOP relating to the establishment of an acceptable payment mechanism for the increased cost of the project.

Unlike past MDI based refinancings, where the sponsor, suffering from weak growth, takes on extra public works as payment in kind for a guaranteed rate of revenue growth from the MOP and the ability to lengthen concessions to make good any shortfalls in those returns, AVS did not anticipate being the victim of weak growth since it is an urban section.

The sponsors therefore negotiated a cash payment from the government, as well as an extension in their concession to compensate for the delays that the additional works have imposed on the road to completion.

The MOP, having originally considered tendering some of the additional works separately, was happy to comply and agreed to issue irrevocable payment obligations (resoluciones) based upon the progress of the works, which AVS sells on a discounted basis to guarantee the receipt of necessary funds to pay construction costs.

The original specifications contemplated three government payments to the project company of UF652,453 ($20.3 million). But the final amount to be paid is UF12 million. This sum, which is to paid in instalments upfront, has been monetised by a UF11 million loan from Banco Santander Chile. The rights to these payments have been assigned to the lender, which also provided a UF3.5 million bridge loan to the project to fund costs in excess of sponsor equity.

The deal also features an XL wrapped UF 5 million local bond issue run by Santander and a UF4 million direct loan from Spanish development bank Instituto de Credito Oficial (ICO) – its first peso denominated loan – on which XL is the controlling party.

Both the ICO loan and the domestic bond issue rank pari passu and carry the same terms – a 24.5-year tenor and an amortization profile designed to mirror the ramp-up and subsequent revenue streams on the concession. The loan also has a staggered drawdown thus avoiding the negative cash carry that it would have were it a bond financing – the domestic bond is drawn upfront, but the ICO term loan can be tailored.

Perversely, the ICO loan was almost a victim of the record low interest rates in Chile. ICO, which although lending in Pesos has its own commercial criteria and cost of funding, found it increasingly difficult to match the terms of the domestic market, and had interest rates dropped any further might have had to exit the deal: the low interest rates did not stop the bond issue from being 20% oversubscribed.

Neither the ICO loan or the UF2.5 million VAT facility provided by Santander Chile are covered by the XL wrap – a departure from the financing structure of the other toll roads in Chile, which normally relied on the insurance coverage for these tranches of debt.

Vespucio Sur has proved a boon for its sponsors. The project does come with some traffic risk, but with an effective eight-year tail thanks to the new MDI agreement, Acciona and Sacyr have more leeway than their peers.

Furthermore, at 4.59% the sponsors also benefit from the lowest interest rate yet for a Chilean concession, although low Chilean interest rates, as much as any financial engineering, explain the bonus.

Sociedad Concesionaria Autopista Vespucio Sur
Status: Closed 19 November 2004
Size: UF21 million
Location: Santiago, Chile
Description: Bank and bond financing for final urban toll road concession in Santiago
Sponsors: Acciona; Sacyr
Debt: UF11 million resoluciones facility, UF5 million local bonds, UF4 million ICO facility, UF2.5 million VAT facility
Arranger and bookrunner: Banco Santander Chile
Lenders: Banco Stantander Chile; ICO
Monoline insurer: XL Capital Assurance
Lawyers to the borrower: Jones Day
Lawyers to the lenders: Debevoise & Plimpton