Since August the pace of Spanish PPP deal flow has picked up again and although some headline deals will not close until February - notably the Eu1.2 billion Perpignan-Figueras high-speed rail link with a deadline of February 15 - much of this year's volume will happen in the remaining weeks.

Despite the similarity between the two years, the market has changed radically in 2004. Liquidity has grown extensively - partly because overall deal volume slowed through much of 2005, partly because many of the deals are getting smaller, and partly because of a second influx of foreign banks into Spain led by the Portuguese, Japanese and Celtic banking sectors.

That massive liquidity looked like putting too much pressure on pricing after the summer lull. But in the past two months, one road project, albeit in two phases, has both calmed banking angst over a long-term slump in Spanish road debt pricing and set the benchmark for the development of a new source of project funding.

While the significance of the Autovia de los Vinedos CM400 stage 1 (Tomelloso-Consuegra) combined bond and debt deal is glaring - the first greenfield project bond in Spain - its lesser known twin Autovia de los Vinedos stage 2 (Toledo-Consuegra) has managed to calm a Spanish banking market made anxious since the close in August of the first of Spain's second phase of real tolls - Ocana La Roda.

Just three weeks ago Spanish bankers were still pondering whether the tight pricing on Ocana La Roda - a flat 110bp over Euribor over 8.5 years, compared to the 140bp pricing norm for Spanish tolls - was a blip or a benchmark.

The deal was great for the sponsors - Ferrovial, Europistas and Budimex. And despite the pricing the mandated lead arrangers - BBVA (which was also bid adviser to the sponsors), Royal Bank of Scotland (RBS), Santander Central Hispano (SCH) and SG - had no problem pulling in La Caixa, Banco Sabadell, HSBC and Caixa Geral as co-arrangers.

Pricing angst calmed
But the start of syndication on Vinedos stage 2 in late November has given credence to the argument that Ocana was a blip. Pricing on the Banesto arranged deal came in at around 130bp - reasonable given Vinedos is a shadow toll and therefore a less risky option than Ocana. And even more convincing given that even by real toll standards Ocana was not an especially attractive credit because traffic volume, and hence revenue, is seasonal.

Similarly, the Eu116 million Palma-Manacor Sacyr-sponsored shadow toll in Mallorca, which is closing imminently, is priced slightly higher than Ocana - despite its shadow toll status. The 27-year Eu57 million senior term loan on the deal is priced at 115bp flat while the Eu28 million subsidy bridge which matures in 2010 is 100bp. Led by BBVA, Calyon and Millennium BCP are also taking a piece of the deal.

The close of the Madrid-Toledo real toll concession in the week before Christmas will add final certainty to Spanish pricing levels, for both shadows and real tolls.

Sponsored by a consortium of medium-size construction companies comprising Corsa/Corvian, Comsa and Sando, and with BES as shareholder and advisory, the original Eu373.4 million bid for the concession was backed by a 30-year loan with a margin of 100bp to 145bp depending on performance.

Millennium BCP, Caja Madrid, La Caixa and Mizuho are all coming into the deal as mandated lead arrangers. Pricing for next week's signing is under wraps but is confirmed as being significantly higher than Ocana.

Alternatives to project debt

More banks and more money have also bred innovation which has included the first greenfield Spanish project bond and, most recently, the first wind securitisation - a Eu7.7 million bond of quasi-equity as part of the Eu72 million Lugo wind farm project financing sponsored by Nuon and arranged by WestLB: although bankers agree the deal is technically a securitisation, it is guaranteed by Nuon via local bank Caixa Galicia and is therefore not completely non-recourse.

There has also been an increase in monoline activity - with XL Capital wrapping both the Vinedos stage 1 project bond and the Autovia del Camino shadow toll road. Those wraps are also symptomatic of a better appreciation of the mechanics of the Spanish project sector by the ratings agencies: Autovia del Camino was the first publicly rated Spanish toll road and Vinedos 2 the first to pull in investment grades from both Moodys and Standard & Poors.

Probably the most challenging deal to close in the market this year was Vinedos stage 1 - many have tried a bond but this is the first to succeed. In fact Vinedos' sister deal was originally planned as a bond but scrapped by the sponsors, Dragados and Cyposa, after a fall-out with the ratings agency.

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.

Although pricing on the wrap has not been disclosed,  the best indication XL will give is "in line with the risk profile on a similar UK deal" - the savings are significant enough to have satisfied the expectations of lead sponsor Acciona, which is a veteran of the Latin project bond market.

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 4.8%, or 42bp over the sovereign equivalent, and sold predominantly to Spanish investors.

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.

Offsetting traffic risk and a back-loaded debt amortization profile, that sees around 43% of the debt amortising in a five-year period, are a number of pluses. The concessionaire is entitled to an upward tariff adjustment equivalent to 100% of Castilla La Mancha's CPI. There is relatively little uncertainty regarding initial traffic, as Stage 2 will replace an existing road (for more details search "Vinedos'").

Further greenfield project bonds are unlikely in the short term. Caja Madrid was toying with the idea for Tranche 3 of the M45. But time constraints, and the complexity of two sets of authorities to negotiate with, forced the Eu160 million project down the debt route: the deal closed on 28 November 2004 with Caja Madrid as sole MLA and Dexia at secondary level.

However, another potential road bond is under consideration for refinancing the Madrid inner ring road M30 motorway or Calle M30. The Madrid city council has set up a publically-owned company - Madrid Trente Finanziara - to finance the Eu3.7 billion project.

The motorway reconstruction is to take place in sections and has been divided into 15 separate projects and four regions - north, south, east and west. Construction started in September 2004 and should be finished by the second quarter of 2007 (although these dates may be over ambitious as the project is already behind schedule).

Even if there are no immediate follow ups to Vinedos stage 1, the deal has opened the door to Spanish PPP in the project bond market, and while the bond part of the deal is small, it demonstrates that such deals are also economically viable for smaller PPP projects. For example XL Capital is currently working on a wrapped bond alternative for the Loures hospital financing in Portugal, as and when it is awarded next year. The same methodology could find its way into the Spanish hospital programme.

Hospitals away

Unlike Portugal, Spain's hospital programme is moving forward tenders blazing. The terms and conditions for the second Spanish hospital PPP - Parla - are out and bids for the first Spanish healthcare PPP - the 800-bed Puerta de Hierro hospital in Majadahonda, Madrid (expected to be completed by 2008 at a build cost of Eu221 million) - went in on 9 December and will be opened on 23 December, although nothing is likely to be done with them until preferred bidder in February 2005.

Bidders include Ferrovial, backed by SG and Banesto; OHL with FCC, supported by Caja Madrid; ACS-Dragados with Dexia Sabadell, ACF and ING; Sacyr with SCH; and Teconsa. Widely tipped to win is OHL, which has a lot of health experience and potential additional equity backing from Caja Madrid.

The deal is a regional concession awarded by the Communidad de Madrid and will be around Eu300 million. The concession is part of a much larger eight-hospital programme modelled on the UK, where the concessionaire builds the hospital and takes performance risk on provision of non-clinical maintenance and services.

The remaining seven hospitals - Hospital del Norte, Vallecas Hospital, Parla Hospital, Valdemoro Hospital, Henares Hospital, the Hospital del Sureste and the Aranjuez Hospital - are all much smaller, around Eu50-Eu70 million.

Spanish PPP 2005

Next year will be a tougher prospect for Spanish PPP arrangers. Once the Perpignan-Figueras rail link is out of the way there will be far fewer headline PPPs, although the Spanish regional shadow toll market looks set to make an impact (search "Marginal Pressure" for more details).

Spain is nearing PPP maturity and will resemble the UK market in terms of size within the next five years. Major deals like Perpignan and the roads projects will become fewer and margins slimmer, albeit slowly, as the market progresses.

Consequently domestic arrangers are already beginning to follow Spanish corporates abroad for headline grabbing opportunities - most notably SCH and BBVA on the Chicago Skyway toll bridge in the US.

But maturity and liquidity are expected to bring further new facets to the Spanish market. A secondary PPP equity market has yet to develop, PPP projects at regional and local government level are fledgling, and concepts like umbrella deals for schools or local healthcare are way off. The Spanish PPP renaissance is not over yet.