South Africa's third and largest toll road sets a new framework for domestic project financing, demonstrating a level of maturity in the country's young debt markets. Lessons have been learnt and the Platinum Toll Highway (or N4W) saw new risk boundaries set. Market risk was banked and CPI-linked debt placed, using innovative financial instruments for the first time. EIB funding was secured and, crucially, it was the first South African project to attract foreign third-party equity. ?The Platinum Toll Highway puts South Africa firmly on the map as an attractive prospect for foreign investment,? states Nazir Alli, chief executive officer of South African Roads Agency (SANRA).

The Bakwena Platinum Corridor Consortium (BPCC) was awarded the 30-year DBFO contract on October 4, 2000. The concession comprises 95km of the N1 road running north from Pretoria and 290km running west from Pretoria to the Botswanan border. 95km is new build and the entire route is to be a stand-alone financed real toll road. The road is known as the Platinum Highway because it traverses the world's richest platinum deposits at Brits/Rustenburg. BPCC is comprised of Murray & Roberts, Grupo Dragados, Hochtief subsidiary Concor Holdings, Wilson Bayley Holmes-Ovocon and a number of local contracting and empowerment groups.

Unlike PPP projects in the public service sector (such as hospitals and prisons) bids for road concessions are not required to include empowerment companies. However, SANRA has made it clear that it would favour offers that did. BPCC therefore successfully secured a number, included special risk mitigation clauses for them and allowed those that wanted to fund their equity stakes through put options.

Securing Dragados, with its financial clout and international expertise in operating toll roads, was described as fundamental to the consortium's success. Dragados' involvement also attracted third party equity from Spanish development bank COFIDES, setting an important precedent for South Africa where there are a number of large scale projects in the pipeline and domestic investment funds are scarce.

The N4W was the third privately-financed toll road to hit the South African markets and marked a significant step forward in terms of what lenders are prepared to take on. The N4E, financed in 1998, was very low-risk, coming with an explicit government guarantee. Neither the subsequent N3 nor the N4W offered this level of comfort but it was on the latter that market risk was really stepped up.

Unlike the N3, the N4W does not have a history of tolling. But the real centre of concern was a busy stretch of commuter motorway running from Warmbaths to Pretoria where travellers have a number of alternatives. This was exacerbated by accusations from the Pretoria Metropolitan Council that commuters would pay a disproportionate amount ? in effect subsidizing the rest of the road. In response, the deal's architects specifically upgraded the Saturn traffic model and pledged a complex system of discounts for commuters. Slightly higher pricing and lower leverage than previously seen reflects the added risk N4W participants took on. Exact pricing has not been disclosed

R2.3 billion ($200 million) of limited recourse debt was raised to fund the project. Nedcor Investment Bank (NIB) acted as lead arranger on the senior debt of R1.25 billion and syndicated it on a club basis. Final allocations left NIB with R213 million, Nedbank with R453 million and ABSA Corporate and Merchant Bank with R588 million.

The senior facility breaks down into a term loan, a subordinated debt and a standby debt facility. Senior lenders have also put up a commercial guarantee for an EIB loan of ?50 million. In the first case of its kind, EIB funds are to be disbursed by the EIB's recently established Rand Treasury so that the loan is serviced and repaid in rand.

CPI-linked debt was considered an important funding component. Repayment demands suit toll road projects, where revenue streams typically start at a low level and steadily increase over time as traffic volumes grow and toll charges rise in line with inflation. For BPCC a CPI tranche was particularly attractive since senior debt service is based on a straight amortization profile starting immediately after the three-year construction period. Since commercial banks will not normally put up inflation-linked debt themselves, standard procedure is to sell it down in capital markets.

In South Africa, however, the capital markets are relatively immature as lenders on the N4E learnt the hard way when they failed to sell-on an underwritten facility. The N4W, however, boasts an innovative solution. Investec signed up to underwrite a R1.04 billion CPI-linked tranche but devised a swap mechanism to guard against unsold debt. According to this, any debt not sold down after five years would convert to conventional variable rate debt from the original date whilst the roll-up of this swap was effectively a subordinated credit. Placement risk was thus taken on by BPCC but they would benefit from the reduced debt service in early years characteristic of CPI debt even on any unplaced portion enabling good cover ratios in the early years.

The ability of Investec to get comfortable with CPI debt was undoubtedly a strong benefit for BPCC's bid. But, as it turned out, the swap will not be implemented because the whole amount was successfully sold down. ?The CPI market in South Africa developed in parallel with this project,? says Jose de Nobrega, global head of project finance. ?Previous issues mean that there is now a benchmark for pricing,? he adds. ?Investec has sold down all debt that it was left holding from the N4E.? He sees the CPI market maturing further with bonds being traded and comments that refinancing projects could become much easier if there is a domestic bond market to tap.

SANRA plans more toll road projects, with the relatively small John Ross highway looking to close in March 2002. N4W demonstrates not only that there is considerable lending appetite but also that the market has the ability to develop financial instruments to mitigate risks. ?The N4W sets the precedent,? says one source. ?It marks the limit to which lenders will go.? For many, however, availability of bank funds is not the issue. It is third party equity. ?There are simply not many funds in South Africa and unless foreign investment can be attracted, third party equity is likely to be scarce for projects in the planned infrastructure programme,? says one source.