Australian toll road operator, Transurban, is in the process of raising A$3.12 billion ($1.72 billion) in debt through Transurban Finance Company Pty Limited. Proceeds refinance existing debt of the wholly owned subsidiary, which owns and operates the City Link road in Melbourne. The company has an A- rating from Standard & Poor's. The 22km toll-operated expressway is split into two sections known as the Western Link and the Southern Link.

The rationale for refinancing now was that the road has been open for nearly a year and ramp up is virtually completed. There is an established traffic flow. Transurban thus wanted to restructure its borrowings in order to free up cash for other projects. The original financing in 1996, which has funded the project through construction and ramp up, was a limited recourse facility. In contrast, the refinancing is on a corporate basis, bringing the debt back on to the balance sheet. Transurban has the concession for the road until 2034.

Debt incorporates a A$1.19 billion capital markets issue, which is fully sold down, and A$1.93 bank debt, which is currently in a general syndication phase. This split allowed the company to spread its maturity profile while taking advantage of the differences in the two markets with respect to pricing and flexibility of terms. There is also a subordinated debt facility of A$150 million, with a 364-day tenor, raised in tandem. ABN Amro, appointed in May 2002, assumed the role of lead arranger for all three and has also underwritten the bank debt.

The transaction marks Australia's first nominal toll road bond deal and the second largest corporate bond issue this year. It comes in slightly behind General Electric's record A$1.7 billion deal, completed in April. Transurban's bonds were watched keenly given depressed market conditions. In reality, however, investors snapped up the bonds with great enthusiasm. The amount was increased by A$190 million from the minimum target at launch. Market players suggest that this success may prompt other toll road operators to follow suit, raising debt in the capital markets. As infrastructure bond issues become more common, standards will be set and finer margins will start emerging.

The notes break down into six tranches. A$260 million of unwrapped paper has a three-year bullet repayment and a fixed rate was priced at 60bp over the three-year swap rate. A second unwrapped tranche of $90 million also has a three-year maturity but is floating rate. It came in at 60bp over the 90-day bank bill rate. Both were rated A-/A3 by Standard & Poor's and Moody's respectively.

The remaining four issues all come with an MBIA wrap and, accordingly, AAA/Aaa ratings. A$175 million of three-year fixed rate notes came in at 60bp over the three-year swap rate. A$65 million of three-year floating rate notes came in at 60bp over the 90-day bank bill rate. A$240 million of five-year floating rate notes with a call option in three years came in a 35bp over the three-year swap rate. Finally, A$360 million of seven-year floating rate notes with a call option in three years came in at 35-days over the 90-day bank bill rate.

As planned, proceeds from the issue took out a A$1 billion bridge loan. The 180-day facility was arranged by ABN Amro in May. In addition, due to the upsizing of the amount of bonds, a portion of the syndicated debt has already been repaid and cancelled. This is a A$170 million three-year tranche.

The rest of the bank debt breaks down as follows: A A$510 million five-year tranche, a A$30 million 364-day tranche, A A$50 million three-year cash advance tranche and a A$20 million Letter of Credit. Westpac is already signed up as a co-arranger and also assisted in the bond issue. A general syndication is now underway. HSBC, ING and China Construction Bank have already committed and it is reported that a number of other banks are expected to join them shortly.

The highly structured nature of this debt raising exercise, with so many tranches in both bank and bond facilities, is designed to effectively stagger maturity and avoid one bullet repayment of such a huge amount. Specifically, the working capital and standby facilities enhance the financial flexibility of the City Link project through provision of undrawn capital. The $150 million subordinated facility, however, is not being raised in direct relation to this project. It is an undrawn facility available to the Transurban Group as an equity bridge or to fund new business initiatives and acquisitions.

Australia is no stranger to toll roads and there is a growing pipeline of privatisation of key roads and tenders for private construction of new roads. In Sydney alone, there are three major greenfield toll roads on the horizon: The Cross-City Tunnel, the Western Sydney Orbital and the Lane Cove Tunnel. Moreover, the market is now maturing and refinancings will start becoming a more common sight on the scene. The Hills Motorway Group, which owns and operates the M2 motorway in northwest Sydney, has debt tranches of A$322 million and A$100 million due for refinancing in 2004 and 2006. For refinancings in particular, the bond route may start to look like an increasingly attractive option. Transurban has led the way.

Transurban Finance

Status: Bonds priced on 31 July 2002 and bank debt in syndication

Description: Refinancing of debt raised to fund construction and ramp up of the City Link toll road project in Melbourne

Sponsor: Transurban Group

Debt: A$1.19 billion capital markets issue, A$1.93 billion senior bank debt, A$150 million 364-day subordinated facility

Senior bank debt: A$170 million three-year tranche (repaid and cancelled), A$510 million five-year tranche, A$30 million 364-day tranche, A$50 million three-year cash advance tranche and a A$20 million Letter of Credit

Bond debt: Unwrapped A$260 million three-year fixed rate, unwrapped $90 million three-year floating rate, wrapped A$175 million three-year fixed rate, wrapped A$65 million three-year floating, wrapped A$240 million five-year floating rate with a call option in three years, wrapped A$360 million seven-year floating rate notes with a call option in three years

Lead arranger: ABN Amro

Monoline: MBIA

Financial adviser to the sponsor: Macquarie Bank

Legal adviser to the sponsor: Freehills

Legal adviser to the lender:

Allens Arthur Robinson