North American Transport deal of the year
Recent toll road privatizations have been the spur for a number of
innovative financing solutions, and the Highway 407 acquisition was
no exception. The road, skirting the North side of Toronto in
Canada, is a proven and busy stretch of commuter route equipped
since its construction under the Canadian government with state of
the art tolling equipment.
Operating since October 1997, the road was offered by the Province of Ontario on a 99-year concession, with the obligation not only to take on existing debt service, but also the concession to add a further 39km to the road's existing 69km. The length of the concession may have added to the purchase price, but it gave the sponsors, SNC-Lavalin, Capital d'Amerique, and Cintra (a subsidiary of Spain's Grupo Ferrovial), enormous financing flexibility. The required sum, C$4 billion ($2.68 billion), consisted of C$3.1 billion for the existing section and C$900 million for the extension and debt service costs.
The consortium, named 407 International, provided C$1.55 billion in the form of cash (C$775 million), letters of credit and other subordinated debt. The debt consists of two bridge facilities, a senior C$2.3 million in three tranches and a junior C$150 credit facility. This semi-perm structure is designed to be taken out quickly- the senior has a three year tenor and the junior a 3.5-year one.
The financing, as with the length of the concession, is tailor made for a capital markets take-out. Indeed the spreads on the facilities, relative to the Canadian interbank dollar acceptance rate, were to decrease substantially if an IPO had gone ahead. Nesbitt Burns who, along with Salomon Smith Barney, advised the consortium, also led a bond issue that raised C$1.1 billion in July, with a further C$400 million coming in October.
At least part of the rationale behind the use of the bridge financing was the urgent need to get the necessary funds in place while the concession bid was being put in place ? around 4 weeks between final bid and close. Given that a further financing raised C$650 million and that a forthcoming issue should raise C$325 million, the bond placements are proceeding comfortably ahead of the two- to three-year schedule envisaged for repayment.
Some of the bonds come with a five-year repayment holiday since after the future construction work 407 will be some 58% longer, taking toll revenues to a new plain. The 24km Western section is now under way, with the further eastern section awaiting approval.
The main concerns for investors were the strength of future traffic flows, although those behind the deal point out that since most of the Canadian dominated debt was sold down into Toronto's domestic financial community little persuasion of the road's efficacy was needed. More importantly, there is little likelihood of the levels of revenues not keeping place with inflation ? there is no government-imposed cap on toll charges. Conversely, there is no government traffic or revenue guarantee, although infrastructure assets in Canada come with ratings higher than some corporates, and usually trade tighter than higher rated ones.
Similar issues have been moving along steadily in the country at the rate of around C$2-3 billion per year, although the number of 407-type assets around is not large. Observers expect some of the infrastructure bubble in the country to recede, although Ontario has just launched a new growth fund. Certainly the government is pleased with the way that the hand-over has progressed, its only real cast-iron support has been the agreement to refuse toll defaulters the renewal of their licences.
There is no doubt the road itself is a first-class asset, and that earlier concerns over the track record of electronic tolling are looking more and more misplaced. Billed as the world's first electronic toll road, it has already installed some 300,000 of the electronic transponders needed for vehicles to use the road ? negating technological risk before the sale.
Of equal importance, the common fear associated with the likelihood of road users finding alternative routes had already been discounted ? Highway 407 is already a relief road for the choked centre of Toronto. Standard & Poors gave the first issues of debt an A rating, although this hinge upon the steady growth of Toronto's traffic.
Operating since October 1997, the road was offered by the Province of Ontario on a 99-year concession, with the obligation not only to take on existing debt service, but also the concession to add a further 39km to the road's existing 69km. The length of the concession may have added to the purchase price, but it gave the sponsors, SNC-Lavalin, Capital d'Amerique, and Cintra (a subsidiary of Spain's Grupo Ferrovial), enormous financing flexibility. The required sum, C$4 billion ($2.68 billion), consisted of C$3.1 billion for the existing section and C$900 million for the extension and debt service costs.
The consortium, named 407 International, provided C$1.55 billion in the form of cash (C$775 million), letters of credit and other subordinated debt. The debt consists of two bridge facilities, a senior C$2.3 million in three tranches and a junior C$150 credit facility. This semi-perm structure is designed to be taken out quickly- the senior has a three year tenor and the junior a 3.5-year one.
The financing, as with the length of the concession, is tailor made for a capital markets take-out. Indeed the spreads on the facilities, relative to the Canadian interbank dollar acceptance rate, were to decrease substantially if an IPO had gone ahead. Nesbitt Burns who, along with Salomon Smith Barney, advised the consortium, also led a bond issue that raised C$1.1 billion in July, with a further C$400 million coming in October.
At least part of the rationale behind the use of the bridge financing was the urgent need to get the necessary funds in place while the concession bid was being put in place ? around 4 weeks between final bid and close. Given that a further financing raised C$650 million and that a forthcoming issue should raise C$325 million, the bond placements are proceeding comfortably ahead of the two- to three-year schedule envisaged for repayment.
Some of the bonds come with a five-year repayment holiday since after the future construction work 407 will be some 58% longer, taking toll revenues to a new plain. The 24km Western section is now under way, with the further eastern section awaiting approval.
The main concerns for investors were the strength of future traffic flows, although those behind the deal point out that since most of the Canadian dominated debt was sold down into Toronto's domestic financial community little persuasion of the road's efficacy was needed. More importantly, there is little likelihood of the levels of revenues not keeping place with inflation ? there is no government-imposed cap on toll charges. Conversely, there is no government traffic or revenue guarantee, although infrastructure assets in Canada come with ratings higher than some corporates, and usually trade tighter than higher rated ones.
Similar issues have been moving along steadily in the country at the rate of around C$2-3 billion per year, although the number of 407-type assets around is not large. Observers expect some of the infrastructure bubble in the country to recede, although Ontario has just launched a new growth fund. Certainly the government is pleased with the way that the hand-over has progressed, its only real cast-iron support has been the agreement to refuse toll defaulters the renewal of their licences.
There is no doubt the road itself is a first-class asset, and that earlier concerns over the track record of electronic tolling are looking more and more misplaced. Billed as the world's first electronic toll road, it has already installed some 300,000 of the electronic transponders needed for vehicles to use the road ? negating technological risk before the sale.
Of equal importance, the common fear associated with the likelihood of road users finding alternative routes had already been discounted ? Highway 407 is already a relief road for the choked centre of Toronto. Standard & Poors gave the first issues of debt an A rating, although this hinge upon the steady growth of Toronto's traffic.
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