April 2001 will see the launch of the latest generation of Chilean toll road financings. The Santiago-Valparaiso marks the first financing for a non-Pan-American Highway section previously the mainstay of the country's infrastructure concession structure. It also looks like creating a new template for concession structures globally and solves some of the difficulties inherent in bond financing for infrastructure projects. And the proposed $300 million equivalent bond issue will test the comfort of Chilean investors for new deal structures.

Rutas del Pacifico is a special purpose vehicle owned jointly by Spanish construction players ACS and Sacyr, each with a 50% stake. It won the concession bid out by the Chilean Ministry of Public Works (known as the MOP through its Spanish name, Obras Publicas) in 1998. The deal has taken some time to come to market, mainly because it falls far outside the norms set by the Pan-American (or Ruta 5) concessions.

The concession links the capital city of Chile, Santiago, with the main port in the country, Valparaiso. A further extension included in the concession takes the route on to Vina del Mar, an exclusive holiday resort for well-to-do Chileans. As such, the section has very solid economic fundamentals, although it benefits less from sending through traffic from outside its own catchment area than the Ruta 5 deals.

The main part of the concession is the 109km Ruta 68 between the two cities, an existing stretch, and two new roads ? the 20km Troncal Sur and 10km between Troncal Sur and Ruta 68. The concession has been operating since August 1999 and much of the construction work is complete. Current revenues under the concession are subject to a sharing mechanism with the government.

This mechanism is important, since the Rutas del Pacifico concession is the first to be offered without a fixed term. Rather, the government plans to offer the concession for as long as it takes for the sponsors to make back a fixed return on their investment. This approach, dubbed the NPV model, is known as the Ingresos Total de la Concession (ITC).

The model has important implications for the way sponsors view the country ? that they are prepared to effectively forgo any upside gained through operating efficiencies and traffic volume improvements. This is reflection of a sizeable shift in perceptions both in the strong potential growth of traffic on the route and the political and economic fundamentals of the country. As with the government's share in possible gains on a currency hedge it provided on last year's Autopista del Maipo deal, it is evidence of a government growing steadily more sophisticated in its approach to the private sector.

Nevertheless, the deal features, unusually, a strong level of involvement from the Inter-American Development Bank (IDB), which has more cause to operate in Chile's neighbours in developing infrastructure. The reasons for this are, essentially, to add an extra level of comfort for investors in an untried concession structure, and to develop the bank's own capital markets expertise. First approval of an IDB guarantee on the financing came at last year's IDB conference in Santiago.

The IDB is providing a partial risk guarantee on the bonds alongside monoline insurer FSA. Whilst the guarantee from both is expected to be full and unconditional (Chilean investors prefer triple-A securities), the partial guarantee is designed to keep the bank within it's limits for per-project involvement in private sector deals. How-ever, a recent report from Moody's gave the deal a shadow local rating of (P)Baa2. Standard & Poor's will also rate the deal.

Moody's greatest concerns are construction and completion risk, successful introduction of new tolling arrangements, and continued economic growth in the region. Most of the road has a history of tolling, and the new sections provide alternative routes to highly congested roads. The sponsors will ensure that the road's system of toll plazas makes toll avoidance harder, and will cushion the less certain prospects for the Troncal Sur section.

At the end of November 2001 the project was 70% complete. The revenues accrued since the start of the concession are currently shared between government and sponsor, on the understanding that the sponsor's share will not go towards the predetermined NPV figure. The sponsors have put up two letters of credit totalling $15.5 million, which cover completion of the project and its reaching predicted revenue levels. Cost overruns are met by the contractor, unless they are caused by the MOP, which adds $8 million to the ITC figure and extends the term of the concession, whose maximum is at present 300 months.

The difficulties in structuring a bond financing around a variable-term concession are straightforward. Pension funds and life assurance companies are averse to investing money in asset of uncertain maturities (for much the same reason they avoid buying into revolving credit deals), and usually demand hefty premiums for early repayment. This premium can have an adverse effect on a project's economics.

The bond issue assumes a 22-year maturity, with amortization starting in 2004. To mitigate some of the problems with prepayment, the deal has a mandatory anticipated prepayment account. This traps cash to ensure prompt and full repayment should maturity be brought forward through early termination of the concession. The precise workings of this trap are unknown but it would be funded to ensure that repayment of at least the remaining seven years in principal and interest (the most optimistic forecasts for revenue still have the concession length at 15 years) would be possible.

Santander begins roadshowing the bonds in the first weeks of April, to an audience of local life companies and pension funds. This audience will have to concentrate unusually hard, despite the IADB's presence, and the pricing that will be available is difficult to predict. If successful, sovereigns might have found a better way to wring the best returns from their most prized assets.

Rutas del Pacifico

Status: Bond roadshow commences April

Location: Chile

Description: Concession for the upgrade and operation of toll road between Santiago, Valparaiso and Vina del Mar

Sponsors: ACS and Sacyr

Debt: 11 million Unidades de Fomento (index-linked form of Chilean Peso, $300 million equivalent)

Bookrunner: Santander Investment

Guarantors: Financial Security Assurance, Inter-American Development Bank

Maturity: 2024 (maximum, see above)