Dragados and Skanska have completed the simultaneous issue of US and Chilean bonds for the Autopista Central road concession. The deal is one of the largest deals ever in the Chilean infrastructure market, and includes the country's largest domestic bond issue. It is also the first to use both dollar and peso debt to finance a road concession.

Autopista Central is the second urban toll road in the country's capital, Santiago, to gain financing. It follows the Costanera Norte deal, which closed about the same time, and which was also pitched to Chilean investors. But while the Costanera section runs east-west, Central runs from north-south, as its Spanish shorthand, Norte-Sur suggests. (For more details on Costanera see Deals of the Year, in next month's issue.)

The Norte-Sur section was bid out by the ministry of public works (ministerio de obras publicas, or MOP) in early 2000, and awarded by the middle of that year. The concession formally started in June 2001, when the first payment from the sponsors was due, as did construction. The winning bidder was a joint venture of Skanska of Sweden (48%) and Dragados of Spain (48%), with two Chilean subcontractors, Belfi and Brotec, each taking 2%.

The two, with their financial advisor, Citigroup, contemplated a number of solutions, including using bank debt. Bank debt had a strong following because of the huge capital cost of the concession, and because spreads on regional bonds can be high. Indeed, towards the end of 2001, Citibank proposed a bank solution to the market, although it never became very far advanced.

A large part of the victory of the bond solution came down to the fact that the bank market would not go much beyond 10 years, and that the MOP, while willing to be creative in the pursuit of financeable concessions, prefers sponsors to look for debt that, like the concession length, is long-dated.

But $620 million is a lot to source in the Chilean bond market, and the sponsors were likely to need to raise at least some of the debt in dollars on the 144A market. To prevent a mismatch between this debt and revenues, which will be in pesos, the Chilean government offers a foreign currency hedge, which was pioneered on the Autopista del Maipo deal.

The hedge is structured to give foreign lenders some comfort against currency fluctuations, while at the same time share any of the potential gains from an appreciation in the peso. The government, rather than a private swap provider, will reimburse the sponsors for any depreciation of more than 10% in the value of the peso. Should it rise, the government shares in the gains, again, above 10%.

Aside from the hedge, however, the government does not offer any other enhancement, unlike the Costanera concession, which uses a minimum revenue guarantee.

The concessionaire here takes full traffic risk, dependent on the driving habits of those driving through the capital. The one advantage this stretch has is that it encompasses the stretch of the Ruta 5 - Chile's main transport artery, and the country's section of the Pan-American Highway - that goes through Santiago.

This means that the concession benefits from high levels of freight traffic - Chile's rail network is minimal - and will be attractive for drivers that want a quick and convenient route through the city. Indeed the route has two parallel sections - one for urban, and one for through traffic - to take advantage of these two types of driver. The two roads, with a total length of 60km, have been in existence for some time but their standard and capacity will be significantly improved as part of the concession.

The sponsors were, therefore, able to gain a reasonably clear idea of how the road's customers might behave. But traffic risk is the reason why the concession gained the lowest possible investment grade. Nevertheless, according to Johan Henriksson, director of finance at Skanska BOT, "the deal gained two investment grade ratings, and we retained MBIA as our monoline around 18 months ago."

Market observers credit MBIA with giving the deal a disciplined enough structure to sell down. MBIA also used its experience in financing Maipo to smooth over the issues that arise when selling bonds in two different institutions. In this case, according to Ivan Mattei, partner at Debevoise & Plimpton, MBIA's legal counsel, it involves mimicking for Chilean bondholders, using parallel sets of documentation, the ability of US investors to delegate their rights as creditors to a monoline.

According to Mattei, "the Chilean bondholders are still able to benefit from a pledge of the concession, but in case of trouble they are not able to act as free agents, calling a default and bringing down the credit, under circumstances in which MBIA, as controlling party, is seeking to negotiate a solution to the problem at hand." This structure mitigates the moral hazard that would otherwise be created by Chilean law. This is important in preventing Chilean bondholders benefiting at the expense of US ones.

The sponsors' aim was to maximize the proceeds from the local issue, and to then approach the New York market for the balance of the required funds. In this, Citigroup's brokerage presence in both markets enabled it to carry out the issue seamlessly. The MOP, however, had to consent to an uncertain hedge commitment, up to a cap, of the final amount that was determined only at close.

The final proportions were 13 million Unidad de Fomento (UF, the Chilean index-linked version of the peso, equivalent to $368 million at close), and $250 million in 144A bonds. According to Henriksson "this was roughly what we thought we would need to raise in dollars, and so worked with the models we were using." Response from investors in both markets was strong, and with two more urban concessions for the Vespucio Ring Road still to be financed, the experience looks valuable.

Sociedad Concesionaria

Autopista Central S.A.

Status: closed 16 December 2003

Size: $795 million

Location: Santiago, Chile

Description: financing for two urban roads with a total length of 60km

Sponsors: Grupo Dragados S.A. (48%), Skanska AB (48%), Constructora Belfi S.A. (2%), and Constructora Brotec S.A. (2%)

Equity: $177 million

Debt: $620 million, of which $250 million is in dollars (priced at 120bp over the US 30-year Treasury) and the remainder in Chilean UF

Bookrunner and financial advisor: Citigroup

Monoline: MBIA

Lawyers to MBIA: Debevoise & Plimpton

Lawyers to the bookrunner:

Milbank Tweed Hadley & McCloy

Lawyers to the sponsor:

Dewey Ballantine (US), Cara y Cia (Chile)