The first publicly rated Spanish toll road - the Eu375 million 70km Autovia del Camino regional shadow toll linking the cities of Pamplona and Logrono in Navarre - has proved very popular with Spanish investors despite its BBB- underlying rating.

Lead arranged by Calyon and Caja Navarra (Ahorro Corporacion), whose combined take is Eu60 million, only Eu100 million of the commercial debt is being syndicated to four further Spanish banks, with ICO already having joined as a co-underwriter. With so little to syndicate the arrangers decided not to award to would-be foreign participants.

The facility features a Eu175 million senior EIB loan, triple-A wrapped by XL Capital, and Eu163.6 million in 21-year uncovered debt that ranks pari passu with the monoline debt. The EIB rarely takes direct risk and never takes project risk before completion - hence the XL wrap on the EIB debt.

Margin on the commercial debt is 90bp during construction (completion is forecast for April 2007) rising to 115bp until December 2010 and then 130bp for the following 7-8 years and 140bp thereafter and until commercial debt term in 2024. Maturity on the EIB tranche is 2027.

The project entails upgrading the existing N111 road from single lane to two-lane and the maintenance and operation of 70km of shadow toll road. In addition, the sponsor will be upgrading link roads and building a 1.3km bridge and tunnel crossing the river Arga.

The deal's shadow toll payment system is linked to Spanish inflation. Lead arranger Calyon is providing an inflation rate swap - a percentage of shadow tolls received will become fixed - to offset some of the inflation risk from the sponsors. In addition, up to 75% of both the EIB and commercial debt is being swapped from floating rate interest to fixed.

Both swaps are designed to stabilise the deal's cashflow and curry favour with the ratings agencies. Although a shadow toll, Autovia deal Camino only pulled in a preliminary BBB- underlying rating from Standard & Poor's (S&P) on its EIB loan, putting it on the very edge of investment grade. And without an investment grade rating XL would have been unable to wrap the deal.

The swap mechanism was acknowledged by S&P as a credit strength and although Calyon is acting as swap counterparty on both, the swaps themselves mitigate each other's risk with inflation theoretically matching interest rate ups and downs.

In addition to the swaps, the underlying credit quality has had a significant impact on the overall structuring of the deal. The tender process by the government of Navarre was originally aimed at a bond deal but the plan was finally discarded because of the credit quality issue with the ratings.

According to S&P its underlying rating reflects 'a somewhat aggressive financing structure and the reliance of debt repayment on increased traffic derived from a new road to be built.' The project also has a back-loaded debt profile (45% of the overall debt is amortized between 2024-2027).

But S&P also concedes that the risks 'are adequately offset by the project's sound rationale, a supportive toll road concession framework, and the long traffic history of the existing road.'

The divergence between the rating agencies and Spanish market perceptions of risk is ongoing - if diminishing. At issue here is the ratings agencies having to deal in hardcore risk modelling on a project by project basis, while the Spanish banks are willing to lend on the back of their strong corporate relationships with the country's huge construction companies, the majority of which have strong balance sheets. For example, the Autovia del Camino sponsor group comprises FCC, Caja Navarra and Navarra Empresas de Construccion (NEC), so Spanish lenders are unlikely to be reticent about the back-ended portion of the debt.

Part of the reason for the back-ended debt profile is a clause placed in the 30-year concession by the awarder, the regional government of Navarre. Debt tenor cannot be longer than 25 years from time of tender and once both EIB and commercial debt are repaid the concession falls due for termination. While the clause leaves an operational tail of five years on the debt should repayments not go to plan, it also means that there is no reason for the sponsor to perform better than forecast and repay debt earlier. Consequently much of the EIB debt amortizes in the three years after the commercial debt tenor - 2024-27.

Ironically, this deal, minus the termination clause, may be the way forward for Spanish shadow tolls - if the EIB can be persuaded to keep coming in and if the ratings agencies cannot be persuaded to adopt a different approach to their risk analysis. Although initially planned as a bond the overall cost of funding on the deal is said to be marginally more competitive than a bond over the same tenor. Furthermore, the biggest problem according to arrangers was equating security to the two different packages and structuring an inter-creditor agreement that met the needs of all parties. That template is now in place.

Autovia del Camino

Status: Signing 20 July 2004

Size: Eu375 million

Description:

Regional shadow toll financing

EIB debt: Eu175 million

Commercial debt: Eu163.6 million

Lead arrangers:

Calyon; Ahorro Corporacion

Monoline wrap: XL Capital

Legal counsel to lenders: Garrigues

Legal counsel to sponsors: In-house

Legal counselt to EIB: Uria y Menendez

Technical advisory: Idon

Insurance advisory: Aon

Model auditor: PwC