Portugal's Grande Porto road deal has reached its long-waited financial close. The Eu842 million toll road concession is the seventh, and last, in the initial phase of Portugal's SCUT (shadow) toll road concession program. Best And Final Offers (BAFO) came in from two shortlisted bidders in June 2001 but the concession was not awarded until more than a year later. Initially, the delay surrounded a legal wrangle by the evaluating committee over certain terms in the bids.

This was exacerbated by a general election. This saw the arrival of a new administration that took time to familiarise itself with shadow toll legislation. In particular, the right-leaning administration is understood to have had reservations over the shadow system, which sees the government, rather than road users, footing the bill. These concerns will not be relevant to the remaining road concessions already heading to the markets, since these are all billed as real tolls.

Once these issues had been ironed out, the project progressed fairly rapidly, with only a month between preferred bidder stage and formal awarding of the concession. The winning consortium, Lusoscut, already has two Portuguese toll road concessions; the Costa da Prata and the IP5. Its lead sponsors are Mota & Companhia (18.56%), Bento Pedroso Construcoes (14.23%), Engil-Sociedade de Construcao Civil (14.23%), OPCA-Obras Publicas e Cimento Armado (12.38%), Banco Espirito Santo e Commercial de Lisboa (10%), BCP Investimento (7.5%). Seven further Portuguese construction companies hold a 3.3% stake each.

The project, which has a 30-year concession, is centred on the metropolitan area of Porto. The total 66km divides into four distinct sections, comprising a mixture of newbuild and expansion: New construction starting in Matoshinos to join the existing IP4 tolled motorway; Maintenance on the existing IC24 motorway just south of Porto airport; new construction of the IC34 as a continuation of the IC24 to Felgueiras; and Construction of a new road linking the IP4 and IC24. The construction contract is held by a joint venture of all the sponsor companies except the two banks. Stakes are in roughly the same proportion as the project company.

Espirito Santo Investment (BES), the trading name of Banco Espirito Santo de Investimento, acted as financial advisor to Lusoscut. Financing breaks down into Eu74 million equity, Eu358 million commercial bank debt, Eu300 million from the European Investment Bank (EIB) and Eu110 million other cash flow, including VAT and other ancillary facilities, during construction. The EIB tranche is a forward fixed-rate loan. A fixed rate applies to every drawdown and payment over the whole 27-year tenor.

As with all previous Portuguese toll road projects in which the EIB has participated, the loan carries commercial guarantees throughout the construction period. However, the release mechanism on this deal is quite aggressive. This reflects a growing willingness of the EIB to take on elements of risk in these European transport projects. It is said that the presence of the EIB is still vital to these deals. Not only is it unique in offering very long-term, fixed-rate loans but it has played a key role in the progression of privately financed toll roads across Europe and therefore brings considerable expertise to the table.

The sponsors note that commercial debt terms have improved considerably since the first Portuguese toll road deals first emerged, with tenors now stretching to 25 years. Nonetheless, the EIB is still slightly ahead, providing a 27-year loan.

Commercial lead arrangers on the deal are BES, Banco Commercial Portugues de Investimento, Caixa Geral de Depositos ? Banco de Investimento, Mizuho Group and Caja Madrid. Debt is now fully underwritten and drawdown commenced from financial close on 17 September. A syndication phase will follow, although possibly not until the New Year. Following successful general syndications on the Costa de Prata and IP5 deals, confidence is high that the debt will sell down with ease. Portuguese shadow toll deals are tried and tested and banks are generally comfortable with the risks.

This is reflected in the pricing, which is similar to the deal's predecessors. On both the commercial tranche and the guarantee, the loan pays 120bp over Euribor during construction and thereafter ranging from 120bp to 100bp depending on financial performance of the project. The better the cover ratios are, then the lower the margin will be.

Following the precedents set by the Algarve and A28 toll roads in Portugal and France respectively, the capital markets was considered as an option for financing Grande Porto. So too were EIB structured finance facilities, which would have marked a first. However, in the end a decision was made that, given the length of time that had already lapsed since BAFO, the priority was getting the transaction completed. The old template, with which Lusoscut and its advisors are familiar, was the most straightforward option. Consensus prevails, however, that bonds are a viable option and are likely to be at least considered for future projects.

Looking forward in Portugal, Lusoscut says that it would be interested in bidding for more road concessions, both real and toll. It has bid for real toll concessions in the past. If rumours are to be believed, real tolls are all that will be on offer, with the new government not favouring the shadow system. But this is far from clear yet.