The Litoral Centro deal marks the Portuguese government's desire to move beyond curtailing its liability under the shadow road regime, and on to limiting the upside to the private sector on real toll projects. This real toll financing is for the first new road project to close in Portugal for two years and is Europe's first variable-term real toll concession.

The Brisal consortium won the design-build-finance-operate (DBFO) Eu795 million project, which involves the construction of 98.4km of highway along the Atlantic coast, linking Marinha Grande and Mira. The consortium comprises Brisa Auto-Estrades de Portugal (80%), BCP Investimento (10%) and SMLN Concessoes Rodoviarias de Portugal (10%), which together provided Eu177 million in project equity. BCP Investimento also acted as the financial adviser. Brisa, has over 1200km of highway under its operation and is Portugal's largest motorway operator and Europe's fourth largest.

At the prequalified stage the state asked for proposals that were flexible, and did not lay down any specifics in the documents. The agreed concession is weighted in favour of the state; the variable term limits the amount of upside to Brisal, whilst exposing the consortium to a degree of traffic risk. The concession will come to an end when the net present value (NPV) of the total toll revenue collected reaches Eu784 million, subject to a minimum period of 22 years and a maximum period of 30 years. The concession ends after 30 years, regardless of whether the consortium reaches the revenue threshold. The project's structure owes a great deal to the experience of the Chilean road sector, which, starting with Rutos del Pacifico, has pioneered variable length concessions.

The project is backed by a Eu575 million multi-tranche commercial bank and EIB facility lead arranged by Banco Comercial Portugues (BCP), Caixa Geral, Mizuho, Depfa and Banco Santander de Negocios Portugal (SCH). There is main term loan of Eu262 million, Eu7.5 million of working capital and a Eu15.5 million performance bond. The margin is 120bp over Euribor during construction, stepping to between 115bp to 130bp depending on performance.

The EIB is providing a Eu264 million loan facility carrying a fixed interest rate of 5.05%. Because the EIB lends at a fixed rate, a reserve account is in place solely to service any penalties that accrue for early repayment of the EIB loan on the attainment of the NPV by the sponsors. The amount required in the reserve account is adjusted on the findings of periodic look-forward tests that project when the concession is likely to end. The tenor of the debt will be the earlier of December 2029 or one year before the end of the concession agreement.

Given the need for a reserve account, the precedence of the deal and the issues of public-side termination that have been evidenced by the government's recent declaration to convert a number of shadow toll projects, a large team of domestic and international lawyers were used.

The project broadly reaffirms the financial topography of Portugal's road sector, where real toll roads along the Atlantic coast effectively subsidise the poorer interior, where most of the shadow tolls are situated. Portugal is suffering under the financial burden of its shadow toll system, although the problem has more to do with speed and huge volume of projects closed, than the degree of value-added the country got out of the deals.

KPMG has recently been appointed to produce a report for the Government regarding the best treatment of the SCUT shadow regime. The government, which has stated that it wishes to change seven shadow tolls, faces a number of obstacles.

The SCUT scheme is in urgent need of change. It is projected that by 2007 the liabilities under the scheme to IEP, the highways agency responsible for the entire road network, will be in the region of Eu700 million. Given that its current annual budget of Eu500 million is already overstretched, either sponsors or government will need to blink soon.

The most significant challenge is the physical nature of the roads. Shadow tolls were used to attract local users, and so generally have many junctions. To convert to a real toll road, either many toll booths need to be erected or junctions closed, so that the toller can recoup sufficient payments. Either option is likely to be highly unpopular with the local populace.

The IEP will also have to come to an arrangement with the equity participants in the shadow schemes. After each concession award a term is woven into the contract that provides that a financial equilibrium should be reached with the sponsors should the government change its position. This is based on a base case rate of return drawn up at contract signatures ? which is likely to be conservative and some distance from the actual returns. So sponsors are likely to be aggrieved but will have little legal standing.

Following Litoral Centro, market participants are suggesting that the government's expectations have shifted. Brisal has set an aggressive benchmark. A less experienced consortium could come unstuck with a maximum term variable concession.

The next projects likely to follow this template are the Eu700 million Douro Litoral highway, just south of Porto, and the Eu300 million Grande Lisboa, which involves the completion of a ring road around Lisbon. Brisa is bidding on both, and has given both Lovells and Vieira de Almeida a rolling mandate.

Litoral Centro
Status: financial close 30 September 2004
Size: Eu795 million
Description: Variable term (30-year max.) DBFO real toll concession financing supported by a Eu264 million EIB facility.
Sponsors: Brisa Auto-Estrades de Portugal; BCP Investimento; SMLN Concessoes Rodoviarias de Portugal
Sponsor financial adviser: BCP Investimento
Lead arrangers: BCP; Caixa Geral; Mizuho; Depfa; Banco Santander de Negocios Portugal (SCH)
EPC contractors: Somague Engenheria
Interest rate hedging:
Banco Totta & Acores
Legal counsel to the sponsors: Lovells; Vieira de Almeida
Legal counsel to commercial banks: Linklaters; Miguel Galvao Teles; Joao Soares da Silva
Legal counsel to EIB: Vinson & Elkins
Legal counsel to the contractors: Goncalves Pereira, Castelo Branco
Legal counsel to the government: Flaminho Roza
Traffic and technical: Symonds
Insurance: JLT