Dragados/ACS and Hochtief have completed the UF16 million ($432 million) domestic financing for the Sistema Américo Vespucio Nor-Poniente toll road in Santiago, Chile. The deal, underwritten by Citigroup, and insured by MBIA, is comfortably the largest ever in the Chilean market. It makes it unlikely that infrastructure financings in the country need ever trouble the dollar market again.

Vespucio Norte is the northern section of the Amerigo Vespucio road that encircles Chile's capital. It is the third of the urban concessions to raise finance, and the first of the two ring road sections. Of note is the main difference between the orbital sections and the two concessions running through the centre of the city - Autopista Central and Costanera Norte. Vespucio Norte follows an existing, and free, route.

As such, the fact that the most ambitious concession yet has exceeded the subscription levels of the earlier two financings is a welcome development. It also shows that the interest in infrastructure assets at Chilean pension funds exceeds the most optimistic predictions of the market's underwriters.

Vespucio Norte Express, the concession company, is owned 54% by Dragados/ACS of Spain, 45% by Germany's Hochtief, and 0.5% each by Belfi and Brotec, Chilean construction concerns. It was formed in July 2002, after winning the concession, awarded by the Chilean Ministry of Public Works (MOP).

The section runs for 29km between El Salto and Ruta 78, and connects with Ruta 5, Ruta 7, and Costanera Norte. It runs through the northern suburbs of the city and will, like the other three urban sections, use the free-flow electronic toll collection that is still rare among roads globally. The sponsors of all three roads will rely upon regular users buying a transponder that will automatically debit an account according to usage. It is envisaged that users will use a single transponder, and toll levels are set at similar levels.

The most important feature of the concession is that it does not feature any explicit government revenue support. Most, but not all, road concessions outside Santiago, as well as Costanera, have come with a minimum revenue guarantee from the government. This features a floor sized to accommodate debt service at which the MOP will provide additional funds to the project. The catch is that excess revenues will be shared with the government. Norte, in common with two other urban sections, is exposed to traffic risk, but offers the potential for higher returns.

As such the financing rests upon the accuracy of predictions for the take-up of the road, as well as for Chile's economic growth. General studies, as well as the Chilean experience, have shown that traffic growth has a strong correlation with GDP growth. Breakeven on the financing requires a consistent rate of 1.65% GDP growth, while a rate of 4.5-5% is assumed for the base case. Chile's growth has averaged 5% since 1984.

Indeed, S&P, which is affiliated with local agency Feller Rate, notes, in a report on the concession, that the revenue projects rely on 'aggressive traffic growth', and that 'the capture rate continues to be a major uncertainty'. It also says that it is unclear whether a 3.5% raise in tariffs, permitted under the concession, is commercially feasible.

The bonds will go towards paying off a $130 million bridge loan from Citi, which has been used to finance construction on the road. This commenced in 2003 and will soon be 60% complete. The sponsors have also contributed roughly $160 million equivalent in equity. The bonds include a four-year interest-only period after completion, which is set for 2006

The financing is also believed to benefit from letters of credit put up by the sponsors. These resemble contingent equity, and can be released if the project achieves a debt service coverage ratio of 1.3x for two years both forward and historical. Dragados/ACS' providers are BBVA, HSBC and Citigroup, while those for Hochtief are KfW, BBVA and Citigroup.

Of the remainder of the road's roughly $600 million equivalent cost, roughly $75 million is in the form of equity, and the remainder, $80 million, is sub-debt.

The two sponsors also guarantee completion. Dragados is a sponsor of the Central concession, which raised $368 million equivalent in UF and $250 million on the international market. Its heavy investment in the city's infrastructure is likely to be a positive factor. Also important is the MOP's past form in coming to the assistance of troubled concessions and making the tweaks necessary to reassure investors.

Citigroup launched the bonds on 25 June, and they were oversubscribed 1.8 times. According to one source close to the transaction, the issue sold out in 45 seconds and achieved the lowest spread on monoline debt yet achieved - 60bp over the equivalent government-issued security. The final coupon was 5.3%, but the level of demand was such that the sponsor was able to sell the bonds at a premium - and reduce its effective coupon to 5.25%.

Nevertheless, the sponsors' willingness to step up and support their project is a notable departure from previous financings, where strenuous efforts on the part of the Chilean government made some deals sellable. It shows that sponsors now have enough confidence in the country's prospects and the roads framework to make these alterations. It is likely that the government's willingness to tweak rural concessions that had fallen short has reassured investors. It has also forced the ratings agencies to stick to conservative growth assumptions.

Moreover, the issue of how the concessions will work together appears closer to being resolved. Dragados, with two concessions and a comfortable lead in completing Central, has already handed out 350,000 transponders, and is taking the lead in persuading the other operators to agree on a central billing company.

Next up is the Sur section financing for an Acciona/Sacyr consortium. There is also one further concession that should be bid out by the end of August. This will complete the toll road sections in Santiago, and attention will focus on upcoming water and prisons deals. These assets have been much less successful in attracting bond financing.

Vespucio Norte Express

Status: closed 25 June 2004

Size: $600 million

Location: Santiago, Chile

Description: financing for northern section of orbital road that will use electronic toll collection technology

Sponsors:

Hochtief, Dragados/ACS, Belfi, Brotec

Debt: $425 million

Maturity: 2024

Coupon: 5.3%

Monoline: MBIA

Underwriter and bridge provider: Citigroup

Lawyers to the monoline:

Debevoise & Plimpton

Lawyers to the borrower: Allen & Overy