Asia-Pacific Transport Deal of the Year 2001 - North Luzon Expressway
Financing for the Philippines' North Luzon Expressway (NLE) marks a
considerable benchmark for transport financing in Asia. The BOT
concession was originally awarded to special-purpose vehicle Manila
North Tollways Corportion (MNTC) in April 1998. The path to
financial close in July 2001 overcame substantial obstacles in the
form of the Asian financial crisis and political upheaval in the
Philippines. Despite these, a successful structure was put together
capable of mitigating risk and wooing international lenders.
For Jeffrey Riopelle, senior vice president, ABB Structured Finance, ?The biggest challenge in getting this deal done was the fact that it was the first transportation project in the Philippines to be completed on a limited-recourse basis. There was no standard concession agreement in place at the outset of this project and all participating bodies spent a lot of time co-operating to make it work.? MNTC signed the original Supplemental Toll Operational agreement in 1998 but a number of points had to be clarified once lenders were on board.
MNTC is sponsored by First Philippine Infrastructure Development Corp (FPIDC), (86%), Egis Projects SA (10%) and the Philippine National Construction Corporation (PNCC), (4%). Running until 2030, the concession entails expansion, rehabilitation and operation of the existing NLE toll road which runs from Balintawak in Metro Manila to the Clark Special Economic Zone. This includes construction and rehabilitation of 14 interchanges, 24 bridges and 31 overpasses as well as installation of electronic toll collection equipment. On completion of works, operational responsibility for the NLE will pass from PNCC, which is the current operator, to MNTC's established operations and management company, MNTCOMC. This has the same sponsor group as MNTC but the stakes are different. FPIC has 46%, Egis 34% and PNCC 20%.
In the deal's early days MNTC considered raising funds through a capital markets issue but onset of the Asian financial crisis commanded a rethink. JP Morgan was appointed as a new adviser in 1999 and it was agreed that the project demanded multilateral support. First to join were the Asian Development Bank (ADB) and the IFC, who stress that they were keen to be involved for two reasons. Firstly, because it sets a precedent for private investment in Asian transport infrastructure and secondly because completion of this particular project has significant social and economic benefits for the Philippines. It is projected that the improved road will encourage industrial and commercial activities at Clark as well as improving access to health and education for many in relatively remote surrounding areas.
ADB and IFC were then joined by a number of multilaterals and insurance bodies to create a highly complex financing structure. IFC and EFIC put up institutional tranches of $45 million and $55 million respectively. ADB pledged a $45 million direct loan and a $25 million B loan. JP Morgan put the latter out to a club syndication along with a $47.5 million MIGA/SEK covered loan, a $35 million COFACE tranche and a $7.5 million letter of credt facility. Commercial banks that signed up pro rata are Industrial Bank of Japan (IBJ), Sumitomo Mitsui Banking Corporation, ABB Structured Finance, West LB, Credit Agricole Indosuez, DZ Bank and Dai-ichi Kangyo Bank. (In January 2002 IBJ and Dai-ichi have merged into the newly formed Mizuho Financial Group).
The highly structured nature of funding serves, in large part, to address perceived political risk associated with the host country but the sheer number of borrowers involved inevitably complex inter-creditor issues. ?My personal feeling is that there were too many lenders on board,? says one source involved in the deal. ?Although it is important to have the support because there is not much appetite for uncovered commercial risk in the Philippines.?
?The sponsors and their advisers were likely playing it safe in light of recent political conditions,? explains Jeffery Riopelle. ?However, that the financing strategy taken was valid is perhaps demonstrated by MNTC not having a single lender drop out of this transaction at any point, despite there being a lot going on in the Philippines in the month leading up to signing. Naturally, this also reflects the strength of the underlying project fundamentals.? Other projects that tried to weather the storm in the Philippines fell by the wayside completely. Currency risk has been mitigated through an explicit stipulation in the concession agreement governing foreign exchange. Toll rates are to be revised every couple of years and the starting tariff is fully hedged against peso devaluation.
Sponsors have provided some protection for lenders with regard to construction risk but there is no comprehensive guarantee on traffic flow. ?It is unprecedented in the Philippines for banks to take on full commercial risk,? says Jose P. De Jesus, CEO of MNTC. ?This is the first project to close without any form of government guarantee from the Department of Finance of the Philippines.? Market risk is not huge for MNTC, since NLE is an existing toll road. However, it is a consideration since tolls are set to rise significantly once MNTCOMC assume operations and there is an alternative route. For lenders to take this traffic risk on board is a significant benchmark for project financing in the Philippines.
?Successful closure of this should definitely make future toll road financings in the Philippines easier,? states one Hong Kong-based banker. A concession agreement was established that foreign lenders, sponsors and the Philippine government got comfortable with. This will be used as a benchmark. ?Although it is likely that any future deals may opt for a simpler financing structure.?
Thomas Olsson, vice president, ABB Structure Finance, points to another interesting issue addressed by this project. ?There is always a discussion within project finance of the relative benefits of negotiated or tendered bids. In this instance the former was a crucial component in getting the deal done. Local sponsors deserve credit for working with the government since 1995 to develop the agreement. It is unlikely that the government alone could have put together such a package to put out to a full tender.? Now that a template has been established, however, they could opt for either route.
For Jeffrey Riopelle, senior vice president, ABB Structured Finance, ?The biggest challenge in getting this deal done was the fact that it was the first transportation project in the Philippines to be completed on a limited-recourse basis. There was no standard concession agreement in place at the outset of this project and all participating bodies spent a lot of time co-operating to make it work.? MNTC signed the original Supplemental Toll Operational agreement in 1998 but a number of points had to be clarified once lenders were on board.
MNTC is sponsored by First Philippine Infrastructure Development Corp (FPIDC), (86%), Egis Projects SA (10%) and the Philippine National Construction Corporation (PNCC), (4%). Running until 2030, the concession entails expansion, rehabilitation and operation of the existing NLE toll road which runs from Balintawak in Metro Manila to the Clark Special Economic Zone. This includes construction and rehabilitation of 14 interchanges, 24 bridges and 31 overpasses as well as installation of electronic toll collection equipment. On completion of works, operational responsibility for the NLE will pass from PNCC, which is the current operator, to MNTC's established operations and management company, MNTCOMC. This has the same sponsor group as MNTC but the stakes are different. FPIC has 46%, Egis 34% and PNCC 20%.
In the deal's early days MNTC considered raising funds through a capital markets issue but onset of the Asian financial crisis commanded a rethink. JP Morgan was appointed as a new adviser in 1999 and it was agreed that the project demanded multilateral support. First to join were the Asian Development Bank (ADB) and the IFC, who stress that they were keen to be involved for two reasons. Firstly, because it sets a precedent for private investment in Asian transport infrastructure and secondly because completion of this particular project has significant social and economic benefits for the Philippines. It is projected that the improved road will encourage industrial and commercial activities at Clark as well as improving access to health and education for many in relatively remote surrounding areas.
ADB and IFC were then joined by a number of multilaterals and insurance bodies to create a highly complex financing structure. IFC and EFIC put up institutional tranches of $45 million and $55 million respectively. ADB pledged a $45 million direct loan and a $25 million B loan. JP Morgan put the latter out to a club syndication along with a $47.5 million MIGA/SEK covered loan, a $35 million COFACE tranche and a $7.5 million letter of credt facility. Commercial banks that signed up pro rata are Industrial Bank of Japan (IBJ), Sumitomo Mitsui Banking Corporation, ABB Structured Finance, West LB, Credit Agricole Indosuez, DZ Bank and Dai-ichi Kangyo Bank. (In January 2002 IBJ and Dai-ichi have merged into the newly formed Mizuho Financial Group).
The highly structured nature of funding serves, in large part, to address perceived political risk associated with the host country but the sheer number of borrowers involved inevitably complex inter-creditor issues. ?My personal feeling is that there were too many lenders on board,? says one source involved in the deal. ?Although it is important to have the support because there is not much appetite for uncovered commercial risk in the Philippines.?
?The sponsors and their advisers were likely playing it safe in light of recent political conditions,? explains Jeffery Riopelle. ?However, that the financing strategy taken was valid is perhaps demonstrated by MNTC not having a single lender drop out of this transaction at any point, despite there being a lot going on in the Philippines in the month leading up to signing. Naturally, this also reflects the strength of the underlying project fundamentals.? Other projects that tried to weather the storm in the Philippines fell by the wayside completely. Currency risk has been mitigated through an explicit stipulation in the concession agreement governing foreign exchange. Toll rates are to be revised every couple of years and the starting tariff is fully hedged against peso devaluation.
Sponsors have provided some protection for lenders with regard to construction risk but there is no comprehensive guarantee on traffic flow. ?It is unprecedented in the Philippines for banks to take on full commercial risk,? says Jose P. De Jesus, CEO of MNTC. ?This is the first project to close without any form of government guarantee from the Department of Finance of the Philippines.? Market risk is not huge for MNTC, since NLE is an existing toll road. However, it is a consideration since tolls are set to rise significantly once MNTCOMC assume operations and there is an alternative route. For lenders to take this traffic risk on board is a significant benchmark for project financing in the Philippines.
?Successful closure of this should definitely make future toll road financings in the Philippines easier,? states one Hong Kong-based banker. A concession agreement was established that foreign lenders, sponsors and the Philippine government got comfortable with. This will be used as a benchmark. ?Although it is likely that any future deals may opt for a simpler financing structure.?
Thomas Olsson, vice president, ABB Structure Finance, points to another interesting issue addressed by this project. ?There is always a discussion within project finance of the relative benefits of negotiated or tendered bids. In this instance the former was a crucial component in getting the deal done. Local sponsors deserve credit for working with the government since 1995 to develop the agreement. It is unlikely that the government alone could have put together such a package to put out to a full tender.? Now that a template has been established, however, they could opt for either route.
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