The Republic of Korea is pushing forward its Private Participation in Infrastructure (PPI) initiative with vigour. 2001 saw closure of a financing that marked two major firsts. The Daejeon Riverside Expressway is the first PPI project to attract foreign equity and the first Samurai bond issue in Korea.

Daejeon Expressway Riverside Funding plc is a special purpose vehicle equally sponsored by Egis Projects Spa, Doosan Construction and Engineering Company and Singapore Piling & Civil Engineering Pte Ltd. It secured a concession from Daejeon Metropolitan City to construct and operate the Daejeon Riverside Expressway Section 4 real toll for a period of 30 years. Doosan has secured the civil works contract and Egis Projects SA will supply the fixed operating equipment. A joint venture between Doosan and Transroute International will operate the tollway.

The funding plan was put together by the financial adviser to the project company, Shinhan Macquarie. Their head of structured finance, Hajir Naghdy, states that it is, ?the high degree of complexity and structure that makes this transaction interesting.? The Macquarie-Shinhan joint venture was set up in April 2000, although Macquarie has had a presence in the Korean project and structured finance market since 1996.

Financial close on Daejeon Expressway signed on 2 November 2001. The project is highly leveraged, with only 3.6% of the total W169 billion funds being put up in equity. Debt breaks down into a 10-year ¥13 billion Samurai bond issue and a W24.4 billion term loan provided by Hana Bank. Nomura Securities fully underwrote the bond tranche at financial close. Rated BBB+ by the Japanese Credit Rating Agency, they were successfully sold down to Japanese institutions throughout November. An Irish special purpose vehicle issued the bonds, due to a preferential double tax return clause between Korea and Ireland. Monies raised were then used to purchase a loan from a Korean offshore lender.

The Hana facility enjoys a guarantee from the Korea Infrastructure Credit Guarantee fund, while Daejeon Municipality has provided a guarantee on both the interest and principal of the bonds. The Japanese Credit Rating Agency pointed to this as the major premise for its BBB+ rating. Daejeon City, located in the east of the Province of Chun-chon Nam-do, is one of the six major metropolitan cities in Korea and considered to be an important centre for the country's transportation network.

As well as a guarantee, the rating agency points to a number of other facets of the city's support. The municipality has pledged to fund and implement all necessary changes to infrastructure surrounding the proposed expressway. It will also support the project's financial obligations in the event that traffic revenues fall far below Agreed Traffic Base Case and, finally, extend the guarantee for five years after maturity of the bonds to allow refinancing. Thus, although Daejeon Expressway is to be a real toll, much of the normal risk associated with this has been significantly mitigated.

?Impetus for a Samurai route arose since the financing profile did not suit a domestic Korean bond issue,? states one source involved in the deal. ?In addition, conditions in the Samurai market were ripe.? There is a history of Japanese investments in Korea. It is a market they are already comfortable in and, given current low interest rates in Japan, a fairly attractive one.

On whether it would be used again, market participants certainly believe it is possible. ?It depends on the continuing health of the Samurai bond market, which no one can predict,? says Hajir Naghdy. ?And also on the particulars of the project and whether its credit profile is conducive to a bond issue. Finally, the difference between the cost of domestic and foreign financing is always a question that needs addressing.?

For one Hong Kong based lawyer, the real highlight of this deal is that it is the first under the PPI scheme to secure foreign equity. Although it is admitted that this may not have been possible without the program of guarantees in place, it is still a benchmark. It proves that acceptable conditions can be provided. Foreign sponsors are prepared to invest in Korean infrastructure.

Daejeon Riverside Expressway is a significant step for financing projects in Korea. Daejeon was the third large toll road deal to hit the markets in 2001. It was proceeded by the W2.017 billion Seoul beltway and the Daegu Expressway, which closed in September and July respectively. Deals coming up in 2002 include a tunnel with a project cost in the region of (equivalent) $142 million.

Korea has an ambitious plan of transport related deals in the pipeline. In the region of 35 projects with an estimated total of up to $70 billion have been outlined. Even if only some of these come to fruition, bank and capital markets, both domestically and internationally, are gong have their work cut out. Equity funds may also be called upon.

Korea is the new hot spot for infrastructure financing in Asia. The government championed PPI framework has successfully encouraged substantial private sector involvement and as a result has generated substantial private sector funding needs. The PPI legislation, which replaced the former Social Overhead Capital scheme provides incentives for private participation in the form of a 50% exemption capital gains tax, a tax rate of 15% on infrastructure bonds issued by the concessionaire and exemptions from acquisition tax and registration tax for all projects. In addition to this are possible guarantees issued by the municipality, as seen on the Daejeon Expressway.