M5: Market opener

The M5 deal is by some measures the largest ever PPP transport financing in central and eastern Europe. Its refinancing and extension opens up the Hungarian market for further investment, an assessment confirmed by the successful close of the M6 financing in its wake. The deal may even foster better conditions for financings elsewhere in the region

Despite the concession changing from a real toll to an availability-based mechanism, the principal uncertainty attached to the deal concerned its size and digestion by the market. The lead arrangers were, in hindsight, never likely to face trouble. In less than a year the wider bank market turned resoundingly in favour of Hungarian project debt.

?The original Eu205 million, 20-year financing was done at a bit of a stretch,? says Richard Games, director, WestLB. ? Just under a year on, and the market was a much easier sell.? Nevertheless, the facility almost tripled in size to Eu750 million.

The original M5 real toll refinancing closed in December 2003 led by BES, EBRD, WestLB and Banca Intesa subsidiary, CIB, and pulled in seven banks in syndication. The facility was priced at 120bp over Euribor for the first five years, rising to 130bp for years 6-10, 140bp for 11-15, and 160bp for years 16-20.

When the Hungarian government decided to change the concession the MLAs took the unusual and probably unprecedented step of buying back the debt from the original syndicate.

The second refinancing led by the same group, incorporated funding for construction of the 48km Phase 2 of the motorway and accounts for the facility's tripling in size. The deal is priced at 130bp over Euribor during construction, 120bp for the first five years of operation, 130bp for the next five, 140bp for the next five and 160bp for the remaining 3.5 years. The participating banks are: BancaOPI, Unicredit, Bank Austria, KBC, OTP, AIB, Bank of Ireland, CDC, Depfa, Dexia, IKB, ING, Islandibanki, KfW, Helaba, Mizuho, Natexis, RBS, and SMBC.

Syndication of the 20-year deal signed 14 December. Of the 20 banks invited, 19 placed commitments with two ticket sizes: Eu30 million for 30bp and Eu20 million for 20bp ? MCC declined. These allotments were significantly scaled back. (search ?M5? for more details at www.projectfinancemagazine.com)

Intesa took Eu80 million; WestLB and BES took Eu50 million a piece; MFB took Eu100 million; and the EBRD took Eu130 million. At sub-underwriting stage 17 of the banks took Eu18.545 million each, and BancaOPI and IKB took Eu12.363 million.

The financing is split into five tranches, each with the same pricing, as well as a further sixth tranche to finance a 15km phase 3 of the motorway in negotiation. Stage 3 of M5 is expected to come to market at the beginning of 2005. The financing requirement will be Eu150 million.

The state-owned motorway operator Allami Autopalya Kezelo (AAK) took a 39.48% stake in the project company in March 2004, as negotiations were underway to change the concession. AAK has an option to buy the remaining equity by December 2009, when the construction is complete.

?The stake taken by the State motorway operator in the equity of the holding company was seen by both parties as the best way to ensure open and constructive cooperation in the long run,? says Paul-Henri Aumont, CEO, AKA. ?Politically it also reduces the net payment of the State to the private sector through the availability fee as almost 40% is in the hands of a state-owned company. The option to buy out the private sector is nothing more than the ability to terminate the PPP on agreed terms, which was missing from our original 10-year old concession contract.?

The principal driver for the conversion from a real toll to an availability-based project was the Hungarian government's wish to bring their entire motorway network under a vignette system.

Given its size, and the momentum of the market, with M6 priced even tighter, what odds on the refinancing of all three phases in the capital markets in 2006? Fairly good, apparently. Says Aumont, ?I think that the obvious move in the present context would be to refinance the whole transaction in 2006, shortly after completion of the works.?

M5 Motorway (phase 1 and 2)
Status: Financial close 21 September 2004; syndication signed 14 December 2004
Size: Eu750 million
Location: Budapest-Szeged, Hungary
Description: Refinancing and extension of M5
Sponsors: AKA Holding ? Bouygues (17.58%); Colas (7.53%);
A-Way (25.11%); CDC Ixis (4.26%); EGIS (1.06%); Magyar Intertoll (3.47%); MOL (1.5%); AAK (39.48%)
Mandated lead arrangers: BES; CIB; EBRD; MFB; WestLB
Financial adviser to state: ING
Technical adviser to the consortium: Kellogg Brown & Root
Insurance consultant: Willis
Legal counsel to state: Clifford Chance
Legal counsel to lenders: White & Case
Legal counsel to the sponsors: In-house