Financing for the western section of Rodoanel, the ring road around São Paulo, and the year's most important transport financing in Latin America, closed in early December 2009. The project company, Concessionária do Rodoanel Oeste, sponsored by Companhia de Concessões Rodoviárias (CCR) and Encalso Construcoes, signed a 30-year concession for Rodoanel Oeste on 1 June 2008.

The project is notable for including untied co-financing from the Japan Bank for International Cooperation, and for its use of a subordinated tranche to mitigate against traffic ramp-up risk. This sub-debt tranche can be replaced with senior debt once the roads revenues justify it, without requiring further lender consents.

The total cost is around $1.5 billion, including a $1.25 billion concession fee payable to the Government of the State of São Paulo, and $200 million in additional capital expenditure. The project is financed with $530 million in equity and $940 million in debt, the largest long-term transport deal in Latin America, and all the more impressive given adverse market conditions. The deal backs the acquisition and tolling of a 32km western section of the Rodoanel.

The debt breaks down into a $100 million 15-year A loan from the Inter-American Development Bank, priced at 375bp over Libor, a $200 million 13-year B loan, funded by Banco Caixa Geral, along with Calyon and Banco Espirito Santo, which is priced at 350bp over Libor, a 15-year $200 million JBIC loan, priced at 375bp over Libor, and a R750 million ($434 million) three-year subordinated loan provided by Bradesco, guaranteed by CCR, and priced at 117.5% of CDI.

The project was originally conceived both to alleviate traffic in the city of São Paulo and to facilitate he communication between Brazil's industrial heartland and the Port of Santos. The construction works for Rodoanel Oeste were concluded in 2002 and the São Paulo State Government decided in 2007 to concession its operation to the private sector as a way to raise financing for the completion of southern section of the orbital road, Rodoanel Sul. The south section is expected to start operations in March 2010, the east section in 2013 and the North section thereafter.

After winning the concession, the sponsors started working closely with the Inter-American Development Bank to structure the financing. Initially, Rodoanel Oeste's financing plan contemplated a 7-year mini-perm structure. But with the advent of the financial crisis in September 2008, the sponsors and the IDB decided to seek alternative sources of financing in order to minimise dependence on international banks, and the mini-perm structure was replaced with a long-term financing.

Key to the transaction was mitigating the traffic risk associated with Rodoanel Sul's eventual start of commercial operations, introducing enough flexibility in the financial structure to attract financial institutions to provide long-term funding, and to capture potential upside for the sponsors once economic activity and financial markets improve.

The solution needed disparate funding sources. IDB brought in JBIC as a lender – it is the first time IDB and JBIC have co-lent to project since a partnership was formalised with the signing of a MOU on 31 March 2009. JBIC joined the transaction with a 15-year direct loan of $200 million. JBIC's exposure to traffic risk is a first and its presence helped attract other lenders.

The Portuguese CGD Group (through Caixa-Banco de Investimento and the group's subsidiary in Brazil, Banco Caixa Geral Brasil) was the first commercial institution selected. Later on, Calyon and Banco Espirito Santo joined CGD Group in the IDB B1 loan.

A R750 million subordinated unsecured debt financing from Banco Bradesco provides financial flexibility in the face of traffic risk. This real-denominated tranche is secured by a sponsor corporate guarantee, and ranks junior in terms of payment and security rights to the senior financing. The purpose of the sub-debt is to keep senior debt leverage low until Rodoanel Sul is fully operational and traffic risk has subsided.

If following the opening of Rodoanel Sul this risk is substantially reduced, the sponsors can take out the sub-debt with senior debt (either an IDB B2 tranche or any other form of debt denominated in Reais or dollars), capped at the existing sub-debt amount, and subject to certain pre-agreed terms and conditions. Particularly important to sponsors was the fact that once the pre-agreed conditions are met they can close this additional senior debt without going to the existing lenders for approval.

The sub-debt can only be replaced at two specific moments. The first moment is nine months after the opening of the Sul section, and the second is 21 months after the opening. Bradesco, while lending with the benefit of a corporate guarantee, stresses that it performed project-level due diligence on the road and insisted on a position in the cash waterfall above equity distributions.

To take out the sub-debt the Sul section must be open, and traffic must have reached acceptable levels, and the road must be maintaining a minimum debt service coverage ratio of 1.5x at the first opening and 1.4x on the second. The exchange rate hedge must be extended by a year, and the debt that replaces the subordinated piece must have a maturity of at least as long as the B loan, would rank pari passu with the senior debt, and could not be converted into dollar senior debt at an exchange rate of less than R1.9 to the US dollar. This last feature prevents the dollar's depreciation from subjecting the concession to unsustainable leverage.

Concessionária do Rodoanel Oeste
Status: Closed 3 December 2009
Size: $1.47 billion
Location: Sao Paulo, Brazil
Description: 32km tolled section of orbital road
Concession awarder: ARTESP
Sponsors: CCR (95%) and Encalso (5%)
Equity: $530 million
Senior debt: $100 million IDB A loan, $200 million JBIC loan, $200 million
B loan: $395 million approved but contingent B2 loan
B loan and hedge providers: Banco Caixa Geral, Calyon and Banco Espirito Santo
Subordinated debt provider: Bradesco
Lender legal counsel: Clifford Chance (international); Machado, Meyer, Sendacz e Opice (local)
Sponsor legal counsel: Mayer Brown (international); TozziniFreire (local)
Sponsor financial adviser: PricewaterhouseCoopers
Insurance: Willis
Independent engineer: Mott MacDonald
Environmental consultant: Freire Consultoria Ambiental
Traffic consultant: TTC