The IP5 marks a peak in Portugal's shadow toll road (SCUT) financing programme. At Eu1.2 billion, it is the largest project to date and almost equivalent to the first UK eight-deal DBFO program. ?The sheer size of this project demanded considerable co-operation between the numerous bodies involved,? says Adrian Olsen, director and head of project finance at Bank of Ireland in London. IP5 also pushes EIB risk barriers, setting a precedent for future shadow tolls across Europe.

The 30-year concession involves widening and upgrading a 167KM stretch of the existing IP5 road which runs from Averio in the west via Viseu and Guarda to the Spanish border at Vilar Formso. This route is of strategic importance to the country, providing a direct link from the western coast to Spain as well as linking the major north-south motorways IP1, IP2 and IP3. Lusoscut, a Mota-led consortium, was awarded the contract in Febuary 2001. Lusoscut previously secured the Eu510 million Costa de Prata SCUT and the same sponsors also own real toll Northern Concession. Lead shareholders are Mota & Companhi (18.56%), Bento Pedroso Construcoe (14.23%), Engil (14.23%), OPCA (12.38%), Banco Espirito Santo (10%) and Banco Commercial Portugues (7.5%).

IP5's financing structure closely follows that of its predecessors, with debt split between commercial banking and EIB funds. It consists of a Eu340 million senior debt tranche, a Eu740 million EIB loan that enjoys a Eu517 million commercial guarantee, Eu126 million cashflow during construction and Eu40 million standby and working capital facilities. Lusoscut has injected Eu102 million in equity

Lead arrangers Banco Espirito Santo, Banco Commercial Portugues, Caixa Geral de Depositos, Abbey National Treasury Services, ING, Bank of Ireland and Mizuho sold down the commercial facility in a one-round syndication, signed on 19 December 2001. Banks that joined at co-arranger level are Banco BPI, Bayersiche Landesbank Girozentrale, Bayerische Hypo-und Vereinsbank, Big Bank Gdanski, Caja de Ahorras y Monte de Piedad de Madrid, Depfa Bank, Halifax Bank of Scotland, Kerditanstalt Fur Wiederaufbau, Lloyds TSB, NIB Capital, Banca OPI.

Pricing on commercial debt is 125bp during construction, dropping to 100bp to 110bp post-completion. Tenor is 25 years with a release profile post-year 17. Cover ratios are regarded as strong with an ADSCR of 1.39 and a LLCR of 1.43. Lusoscut collects payment for operation of IP5 according to four traffic bands. These were set by the consortium during their bid and are designed to transfer optimum risk while still providing comfort for lenders. The top band pays no toll.

Market response to the deal was healthy, backed up by oversubscription to the tune of 200%. Debt markets have become fairly comfortable with shadow toll roads and this was a high-profile transaction. A specific feature of IP5 is the forward fixed-rate structure on the EIB tranche. According to this, all of the EIB funding (drawn down in a number of stages) has been secured with a single agreed interest rate. Achieving interest rate certainty over the entire life of the EIB loan inspires confidence in all parties involved and reduces the need for other hedging instruments. This strategy was first used by Lusoscut's shareholders in financing the Northern Concession.

IP5 saw the EIB take one step further. Tenor on its tranche is a record length at 27 years but the deal also sets a new precedent in terms of commercial risk allocation. Although actively and enthusiastically participating in toll road programmes across Europe, the EIB has steadfastly refused to take on project risk, demanding irrevocable guarantees from commercial lenders. On the IP5, however, it agreed to a far more aggressive fall off than in the past. Half of the guarantees drop at year eight and by year 16 the facility is fully released.

The EIB's decision confirms a robust financial structure underlying IP5. The institution is typically cautious in its treatment of risk but this transaction has ushered in a new approach. ?The fact that the EIB was prepared to relax its conditions for debt provision was good news for IP5 but also for future toll road financings across Europe,? confirms Adrian Olson. Greece and Ireland are also launching ambitious plans for DBFO shadow toll roads.

In Portugal itself things are set to change with all the road deals in the pipeline being real tolls. IP5 and its predecessors have proven that debt appetite for SCUTs is considerable. But in real tolls, the concessionaires take on a huge element of market risk. ?Some lenders are definitely put off,? says one market player. There have, indeed, been a handful of instances where projections have been way off mark and all project participants had their fingers burnt. But the deals can be done and have been in the past in, for example, Portugal and South Africa. But the SCUT financing structures will not fit so easily to real toll projects. Lenders demand tighter comforts and are highly unlikely to see projects the size of IP5 coming out of Portugal while real tolls are in favour.

A contentious issue when closing these deals in Portugal (be they shadow or real tolls) is the Best And Final Offer (BAFO) system. The two best bids are chosen from initial submissions at BAFO and the selected consortia then have to submit fully-underwritten proposals. The benefit to the government is full commitment before they evaluate final proposals. But for the bidders themselves and their lenders it vastly increases due diligence at a stage when they only have a 50% chance of winning the contract. In addition, the project bears interest rate risk between BAFO and financial close. In the case of IP5, Lusoscut mitigated this through purchasing an interest rate swap option which covered the BAFO evaluation period.