Bina Istra 1B: Bonds take to the road
The deal is not only a unique structuring in terms of debt repayment support, but also the first project bond in eastern Europe. Furthermore, it has set a record project tenor for the country ? 19 years compared with 12 on the Dm215 million Bina Istra Phase 1A project financing in 1997.
The Bina Istra consortium comprises Bina Fincom (67%) which is in turn 51% Bouygues-owned; Bouygues with 16% direct; Croatian Motorways with 14.8% and Istarska Autocesta (2.2%). The combined Bouygues stake amounts to 50.17% overall.
The project involves three phases: 1A (completed and operational since 1999), 1B (including construction of the Mirna viaduct), and Phase 2, creating a Y-shaped system running from the south into central Croatia and then branching north-east and north-west. Phase 1B consists of three sub-phases: 1B1, 1B2-1 in the west, and 1B3 in the south. The majority of Phase 1B will be new construction except for a portion of 1B2-1, which already exists but is not yet in operation.1B1 and 1B2-1 will be financed with the proceeds from the bond offering, which will also refinance Eu89 million of Phase 1A. Phase 1B3 will be financed by the term loan.
The length of the concession varies depending on the achievement of various milestones (subject to a longstop date of 32 years from 3 December 1999). Phase 1B3 is optional under the construction contract and if it is not built the concession agreement will end in September 2023. If the whole project is completed the concession continues until the second half of 2027.
The financial mechanism at the heart of the deal is a constantly replenished debt service reserve account (DSRA). The Croatian government pays a financial contribution (not a shadow toll because payment is not subject to traffic volume) at the beginning of the year that is added to forecast toll revenue for that year, thus matching total income to all operating and maintenance costs, debt service and a guaranteed 5% return on equity for the sponsors on Phase 1A (although in the cash flow cascade equity payment is subordinated to operating expenses, debt service, and replenishment of the DSRA). Any shortfall during the coming year is met by funds from the DSRA. That amount is then added to the following year's financial contribution from the government and the DSRA is topped up again. The DSRA runs at 12 months from 2003 to 2009, and to 15 months from 2010 to maturity of the bonds in 2022.
During the three-year construction period (2003-2005), 64.3% of the project will be funded by debt. The state contribution will account for 18.6% of the project's costs and 3.5% will be financed by equity.
The remaining funds will come from toll revenues from the existing Ucka Tunnel (11.3%), interest income, and release of cash from the DSRA from phase 1A.
The Phase 1B financing is split between Eu210 million in senior secured bonds maturing in 2022 with a grace period of 5.5 years; a Eu72 million 3 year construction term loan with a 2.5 year grace period from the end of availability and final maturity in 2022; and a Eu30 million cost overrun facility. All debt ranks pari pasu in the cashflow cascade and security, and both bonds and debt have exactly the same term.
Pricing on the floating debt has not been confirmed but is ?very similar to the coupon on the bond?.
UBS has already pulled in underwriting commitments from DePfa, Bank Austria and local bank Zagrebacka. Allen & Overy is acting for the banks on the deal with the issuer using internal counsel from Bouygues.
Moody's has rated the Eu210 million bond BA while S&P has given it BB+, just under the sovereign ceiling of BBB-. The coupon is 8% fixed rate and has an average life of 15 years, remarkable given the Croatian sovereign curve does not extend beyond 10 years. The bond is also unwrapped due to the strength of the payment support mechanism from the Croatian government.
Although the deal structure effectively eliminates traffic risk, traffic forecaster Jacobs Gibb has nevertheless proposed a very modest 3% growth per year in volume as the basis for revenue forecasting. Croatia's rocketing popularity as a tourist destination (revenues from tourism in Croatia grew by more than 30% between 1997 and 2001), the vastly improved road standards and capacity (the Ucka Toll Tunnel has an effective capacity of between 20,000-25,000 vehicles per day and is currently running at 25% capacity on average) mean that toll revenue will very likely be bigger than forecast.
The fundamentals of Bina Istra Phase 1B are very sound. Nevertheless the amortization profile is back-ended with 50% of issued debt amortized in the last five years of the tenor. This worsens if 1B3 is not built, bringing the concession agreement to an end in September 2023 and leaving a tail of only two years taking into account DSRA of 15 months. Furthermore, although Croatia has the legislation, it has no established track record in security enforcement.
But any minimal risk is offset by the strength of the financial structuring which is reflected in the investor appetite. Simply put, UBS Warburg was remandated in August 2002, the deal closed unwrapped within six months, the bonds were presold and oversubscribed by 50%.
Bina Istra Phase 1B
Status: Closed 25 February 2003
Location: Croatia
Description: Combined debt/project bond financing for construction of toll road
Total project cost: Eu390 million
Project Bond: Eu210 million
Project Debt: Eu72 million
Equity: Eu14 million
Sponsors: Bina Fincom 67% which is in turn 51% Bouygues-owned; Bouygues 16% direct; Croatian Motorways 14.8%; Istarska Autocesta 2.2%
Lead arranger and advisor: UBS Warburg
Subunderwriters: Zagrebacka; DePfa; Bank Austria
Legal counsel to the banks: Allen & Overy
Legal counsel for the sponsor:
Bouygues internal counsel
Traffic Consultants: Jacobs Gibb
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