For the Autopista Central Project, the Sponsors had several options to finance and submitted the bid without having a committed financing in place. In fact, even construction started without a long-term financing for the project. This made the financing process a lot more challenging. While normally a sponsor will try to have a firm financing plan lined up behind a bid, or before construction, a sponsor may wish to keep its options open.

The main options were to go either for a bank debt solution or a bond solution. A bank debt solution has the disadvantage that the bank market is not willing to go very far beyond 10 years in tenors.

Over time the bond solution emerged as being more attractive and the Sponsors started to focus their work on the issues related to this solution. The main challenges were the traffic law and how the tolling system would work in that legal environment, expropriations and change orders, and also the timing of the bond placement.

Project description

In the middle of 2000, Sociedad Concesionaria Autopista Central S.A., formed by Grupo Dragados (recently merged with ACS) of Spain (48%) and Skanska AB of Sweden (48%), together with Belfi and Brotec (2% each), both from Chile, was awarded the Norte-Sur Toll Road Concession, now Autopista Central. The Concession consists of some 60km of freeway running in two parallel tranches, north-south through the city of Santiago de Chile. The concession is part of the comprehensive transportation plan called the Plan de Transporte Urbano de Santiago developed by Ministerio de Obras Publicas (MOP), the Chilean Ministry of Public Works.

This plan consists of four toll road concessions of which the Autopista Central Toll Road is the largest. This concession is the Santiago portion of the vital Ruta 5, which runs the length of Chile. It is therefore one of the most important of the toll concessions in Santiago, enabling traffic on Ruta 5 to easily pass through Santiago while at the same time ensuring uninterrupted traffic flow for commuters in the otherwise heavily congested city.

The Autopista Central Toll Road will, as well as the other toll roads in Santiago, use an Electronic Tolling Collection System (ETC) enabling users to travel on all the toll roads in Santiago using the same technique. The ETC system is a free-flow system with a transponder on each vehicle that is being registered by gantries on the different road sections. This enables the users to enter the roads without having to slow down to pay toll and also eliminates the use of barriers and toll plazas, which typically require large areas of land. In the end of each month the users will receive only one invoice from the Concessionaires. The payment from the invoice is then allocated to the respective concessionaires according to which sections of the toll road system the user has driven on.

This is the first time this system will be implemented in Latin America and the third time globally. Similar systems are in use in the Melbourne CityLink, Australia and on the 407 Highway in Toronto, Canada.

Financing

In July 2001 the Autopista Central Concession and construction started. In parallel, the process of procuring financing for the project was ongoing. Two and a half years of intensive work on the financing led up to the successful financial close on 22 December 2003.

A groundbreaking 23-year dual-tranche bond financing was placed in both the Chilean and US capital markets. The total amount of the two bonds was $618 million, making the financing the largest ever in the Chilean infrastructure sector. It was also the largest-ever wrapped Chilean infrastructure project bond, and the whole transaction is considered a landmark deal, as it has acted as a catalyst in developing and deepening the Chilean capital market.

The local Chilean UF-denominated bond amounted to an equivalent of $368 million with an interest rate of 5.69%. The US Bond amounted to $250 million with an interest rate of 6.223%.

Both bonds were wrapped by MBIA and, based on that, rated AAA/Aaa by Standard & Poor's and Moody's, respectively.

One important issue we had to consider was the timing of the bond issuance. Interest rates were at a historical low; both in the local market as well as the international market, at the end of 2003. There were some worries that the rates would start to move upwards so the Sponsors had an excellent opportunity to close at attractive rates.

However, in the end of the year it became clear that Central bonds would face a lot of competition in the local market. One of the other Santiago toll road concessionaires, Costanera Norte, was poised to issue their bond one week in advance of Central. In addition a lot of Chilean corporate bonds was about to enter the market, so investors had a lot of options. Would the local market be able to absorb its issuance or would it be forced to wait until the first semester of 2004? Since Christmas holidays was coming up and summer vacations starts in February in Chile, if Central decided to postpone its issuance, it would possibly end up in March. Nobody could say anything about what the market conditions would look like in March.

The Sponsors and underwriters decided to initiate the process and go to the market in December and the Chilean market proved their worries to be wrong - it was surprisingly deep and there was a great demand for the bonds, both in the local market as well as overseas. The local bond issue was 63% oversubscribed and the international was 300% oversubscribed.

During the work with the long-term financing the construction of project was financed by two bridge facilities amounting to a total of US$220 million. The facilities were paid back by the bond proceeds on the day of closing.

Major risks for implementing the financing

Traffic Law

Since a free-flow system will have no barriers or toll plazas, vehicles will be able to enter the toll road system without stopping or even slowing down. This feature of the system is a great benefit mainly as it minimizes the use of land in an urban environment but on the other hand it creates a payment risk that needs to be handled if the project is to be financeable.

There are two ways for the users of the road to pay; either by setting up an account with the Concessionaire and thereby receiving an individualized transponder for their vehicle or they can pay in advance for a day-pass. The ETC system is designed to register all vehicles that enter into the toll road. When a vehicle enters under a gantry, sensors searches for the signal from the transponder that is attached on the windshield of the vehicle. If the vehicle doesn't have a transponder the system reacts and takes a picture of the license plate of the vehicle. The system then compares the license plate number with a register for day-passes valid on that specific day. If the number is not on that list the owner of the vehicle is considered to be a traffic violator under the Chilean Traffic Law.

From the financiers' point of view, the existing Traffic Law at the time of bidding was not adequately designed to deal with the free-flow system. If the project was to be bankable, the possibility of enforcing legal action against non-paying users had to be enhanced. In addition, the law had to contain sufficient deterrents to keep motorists from entering the road without paying. Since MOP had requested this specific tolling system in their bidding documents, the Bases, they were instrumental in the process of implementing the needed amendments of the traffic law.

The process of amending the Traffic Law in order to fulfill the requirements of the financiers was initiated in mid 2001 and the amended law was ratified late in year 2002, and the changes to the Traffic Law is crucial to all the toll road concessions in Santiago.

Expropriations and the Convenio Complementario (Change Order)

Even though most parts of the toll road will be constructed on the site of the existing road there will be a need for additional land in some sections and crossings in order to implement the most efficient design, cost-wise but above all safety-wise.

Typically in infrastructure projects, expropriation can be a delicate issue that the sponsors are normally not the best placed party to handle. As in many other projects, the responsibility for the expropriations rests with the Government, in this case, the MOP. The process of the expropriations has progressed well, although there has been a delay that has had an impact on the projects' overall timeplan.

This delay, in addition to the MOP identifying necessary improvements to its original design that it wanted to implement in the construction, initiated the negotiations of the first Convenio Complementario (CC), to the construction contract.

The additional works and compensations for delay under the CC was worth some $115 million and the outcome of those negotiations would have an impact on the overall financing structure that the Sponsors were working on.

The negotiations started late in 2001 and were concluded in the first half of 2003. The payments from MOP under the CC would come in installments according to progress of the additional works and after certification from the independent engineer and Inspector Fiscal of the invoices. The sponsors were obliged to procure financing for the CC, separate from the bond financing. This financing was essentially structured by way of discounting the certified invoices with a local bank with good knowledge of the MOP. This particular financing was successfully closed in mid December 2003 and was a condition precedent to the bond financing.

Resources and competence within the sponsor consortium

The complexity of this project has at times been overwhelming. Although the Sponsors had a large number of experienced external consultants and lawyers involved, the in-house competence within the consortium is a critical issue. With all the issues demanding attention and all the information provided by our external consultants on the different matters it was crucial to channel the input to the right kind of resources within the sponsor companies, in order to keep the process going and taking necessary decisions when needed.

Both Dragados and Skanska are two large organizations that have an experienced staff with competence in different disciplines. Apart from structured finance related issues, the project also included complex legal aspects as well as treasury issues with potentially great impacts on the sponsors' parents, if not treated in a correct manner. In addition to the above capacities, financial strength and stamina is of the essence.

Project fundamentals

In a large financing there are many aspects and risks that need to be identified, thoroughly analyzed and quantified in order to find the most appropriate mitigation. As the environment, and with it different parameters, are constantly changing, risks that look big in the beginning might change over time and other aspects gain more importance.

Looking at the projects pros, the sponsors identified several benign aspects of the concession that after an assessment led to the decision to proceed with the project. Some of the most important factors were the robust economics of the project, the fundamentals of the Republic of Chile and the commitment from the Government of Chile to implement such infrastructure projects by way of, for example, well-designed concessions legislation.

The most important economic parameters are defined by the characteristics of the traffic. The Sponsors used an advanced traffic model to quantify the level of traffic that would utilize the road. The Autopista Central project benefits from an existing traffic flow with well-identified travel patterns. Since the road has existed for a long time and has a central role in the infrastructure of Santiago and also Chile, the initial inclination was in favour of investing. Several months of work with the traffic model and traffic consultant to cover all angles of the traffic proved this inclination right.

The sponsors of the other Santiago road concessions chose to use the minimum revenue guarantee (MRG), an instrument designed by the MOP to deal with traffic risk. Essentially the MRG provides a way to share both the traffic-risk and revenues between the concessionare and the MOP. In Autopista Central the numbers from the traffic model made the Sponsors feel comfortable about taking on all the traffic risk and thus they opted not to ask for the MRG.

The fact that they decided not to use the MRG added more complexity to the analysis of the rating agencies. Central performed several extreme stress cases, which made it even more comfortable about the economics of the project. It also agreed to supply more contingent equity support during the ramp-up period, than it had initially considered.

The concession needed to have a rating of at least investment grade in order to have the project wrapped by MBIA. During the end of 2003, it received a rating of BBB- and Baa3 from Standard & Poor's and Moody's respectively.