Vinedos stage 1: The outsider

Spain's first greenfield road bond ? the combined bond and debt financing for the Eu212 million Autovia de los Vinedos CM400 stage 1 shadow toll ? was the 2004 deal that many in the project market did not think would happen.

The project funds the upgrade and construction of 74.5km of shadow toll road between Tomelloso and Consuegra: increasing from one lane to two, in both directions, a 24km section of the existing CM400 highway and building both a new 42km road and 9km bypass at Tomelloso.

The financing is not big ? the deal comprises Eu64.1 million in 23-year bonds and Eu103 million of 26-year EIB debt, both triple-A wrapped by XL Capital and ranking pari passu, and Eu44 million in equity plus some shareholder sub-debt ? but it is significant for a number of reasons.

The issue follows a number of failed Spanish bond attempts, including that of its sister deal ? Autovia de los Vinedos stage 2 (Toledo-Consuegra) ? which switched to a straight debt package, arranged by Banesto, after talks between the sponsors, Dragados and Cyposa, and the ratings agencies broke down.

Both bond proposals required investment grade ratings to get a monoline wrap and boost the economics. Unlike its sister deal, Vinedos 1 pulled in investment grade ratings from both Moody's and Standard & Poor's ? the first Spanish road financing of any type to do so ? and despite the added complexity, was very competitively priced for the sponsors, led by Acciona.

The reason Acciona stuck with the bond and did not follow Dragados down the bank debt route is rooted in the original tender.

At time of tendering, Jose Bono, now defence minister, was president of Castilla y Mancha and had indicated, both publicly and in the bid document, that a ?Bono? (bond) for both deals was preferred. The whole scheme subsequently became known as Bono's Bono.

While Acciona put in a bid with the internal rate of return (IRR) based on a bond solution, the Dragados IRR was based on syndicated loan examples. Consequently, when Dragados' negotiations with the ratings agencies became difficult it went with a bank debt package.

Conversely, any change for Acciona away from its original bond plan would have meant a drop in IRR of between 1-1.5%. Fortunately for Acciona the bond plan paid off, and with very competitive money.

Managed by Caja Madrid (also sole financial advisor to the issuer and underwriter and placement agent of the bonds along with Caja Castilla la Mancha) the 23-year bond portion of the deal is fixed rate with a coupon of 4.84% paying a spread of 47bp over the sovereign equivalent, and sold predominantly to Spanish investors but with 20-30% uptake from internationals.

The monoline wrap for the deal was competitively tendered to four monolines with bids received from MBIA, FSA and XL. The only tangible difference between the bids was XL's flexible terms, so enabling the sponsors to boost IRR by 3-4bps. Pricing on the wrap has not been disclosed, but the savings are significant enough to have satisfied the expectations of Acciona, which is a veteran of the Latin project bond market.

Caja Madrid also swapped the 26-year EIB debt from floating rate to fixed. And because both the bond and loan are cross-defaulting, the price for the XL wrap is the same on both.

Despite the success of the deal the 30-year concession is not without risk. Structured through special purpose company AUVISA, the road will not serve a key corridor, with most traffic expected to be local ? forecast initial traffic levels are 5,600 vehicles per day.

The project is also exposed to traffic risk under the shadow toll arrangements (for more details on the concession terms search ?Vinedos? on www.projectfinancemagazine.com); and the financial structure is fairly aggressive, with a back-loaded debt amortization profile that sees around 43% of the debt amortising over a five-year period.

Offsetting these risks, however, are a number of pluses. The concessionaire is entitled to an upward tariff adjustment equivalent to 100% of Castilla La Mancha's CPI and there is relatively little uncertainty regarding initial traffic, as the project will replace an existing road.

Construction risk is also low. Construction does not involve any major structures, the terrain does not present any difficulties and the sponsors are providing a turnkey wrap.

Most significantly, the project's debt service coverage ratios (DSCR) are adequate for investment grade under the sponsor's base case and also under a range of additional traffic stress scenarios performed by the ratings agencies.

Base case is a minimum annual DSCR of 1.3x and an average of 1.8x. In addition, the project benefits from sufficient liquidity in the form of debt service and ratio maintenance reserves that up average DSCR to 1.9x.

The significance of Vinedos 1 is long-term. Although growing Spanish bank liquidity means more greenfield bonds are unlikely in the short term, Acciona has already considered a bond refinancing for the M45, only dropping the idea because Caja Madrid tabled a very attractive bank debt solution. And a repeat of the Vinedos 1 deal was also seriously proposed for Ferrovial and Acciona's bid for the Majadhonda hospital project (on which the winning bidder has yet to be announced). Despite looking an unlikely short-term repeat, the Vinedos 1 template may yet surprise the project market again.

Autovia de los Vinedos stage 1 (AUVISA)
Status: Closed November 2004
Description: Combined greenfield shadow toll project bond and loan package
Total debt: Eu167 million
Loan: Eu103 million
Bond: Eu64 million
Sponsors: Special purpose company AUVISA's owners are Acciona (42%), Constructora Sarrion (42%) and Caja Castilla la Mancha Corporacion (16%)
Arranger and financial adviser: Caja Madrid
Multilateral loan provider: EIB
Monoline insurer: XL Capital
Legal counsel to issuer: Gomez Acebo y Pombo
Legal counsel to XL: Garrigues
Legal counsel to EIB: Clifford Chance