The Eu1 billion ($1.4 billion) GSM-R project – a telecoms system for the French rail network – has closed with a competitively priced Eu600 million syndicated debt package, with lenders assuming full construction risk.

The financing has hurdled some significant obstacles including limited liquidity following the financial crisis, the insolvency and drawn-out sale of its equipment supplier Nortel, and complex intercreditor negotations.

The Vinci/TDF/AXA/SFR consortium was named preferred bidder on the 15-year design-build-finance-operate-maintain PPP by Reseau Ferre de France (RFF) in February 2009. Credit Agricole CIB (then Calyon) had committed to fully underwriting the commercial debt in December 2008, and underwrote the full amount early in 2009. Royal Bank of Canada was financial adviser to the consortium, with Freshfields acting as legal adviser.

The deal became complicated when Nortel, which had been named equipment supplier by RFF, filed for Chapter 11 protection in early January 2009, a month before the preferred bidder was announced. Late-stage bidders therefore knew that the project would involve the eventual change of ownership of Nortel, but they assumed, following a public statement, that Nortel and its creditors had committed to not dismantle the company before selling it. It was only towards the end of April, two months after the Vinci consortium and its sole underwriter had taken the deal on, that Nortel announced that it would sell the CDMA and GSM arms of the business separately, potentially doubling the time it would take to transfer ownership.

And the sales did take a long time – the best part of a year. Nortel made a tentative agreement to sell its CDMA unit to Nokia in May, but ended up selling it to Ericsson in July. In September, a preferred bidder was selected for the GSM sale, but the decision was put back. Finally, in early December, it was announced that Ericsson and Kapsch would buy the GSM business, with Ericsson taking control of the Americas side and Kapsch everything outside of the Americas.

Lead arranged by Credit Agricole CIB (bookrunner), BBVA, Santander, KfW, BayernLB, Dexia, Credit Agricole Leasing and SMBC, the Eu600 million 14-year commercial debt has a margin starting at 250bp over Euribor, rising to 275bp post-construction (at 4.5 years) and rising to around 300bp between years 9 and 14.

Banks were originally offered Eu75 million tickets, but the deal was oversubscribed by around 15%. This led to a pro rata reduction in allocations, excluding KfW, which came in for Eu50 million because it was able to commit to a faster credit approval process on that basis. The final average ticket size was Eu65 million. ING made a late effort to enter the deal in January, but was not successful. Banks had already been scaled back, and were unwilling to reduce their takes any further.

The EIB has lent Eu280 million, and Caisse des Depots et Consignations (CDC), a lending arm of the French state, has put up Eu130 million. The two loans, which have 15-year tenors, will become a Dailly tranche post-construction.

Another factor slowing down financial close was the pace of negotiations between the EIB, CDC, RFF and the sponsors. Issues related to clauses attached to the commitments from the EIB and the CDC came up in September 2009. The CDC was concerned about any possible future changes to the status of RFF. Should RFF go private at any time over the life of the debt, the fund's internal regulations would make it impossible for it to continue as a lender.

The EIB was also concerned about the Dailly mechanism and how it operates post-construction to guarantee that lenders benefit from availability payments in the event of default. The exact details of the bank's concern are still not clear, but one banker close to the deal said that the EIB perhaps misunderstood the Dailly mechanism to be a more comprehensive debt guarantee, and that the multilateral did not take the time to identify exactly how it would affect aspects of the intercreditor agreement. The problem also likely surrounded concerns about what would happen in the event of RFF being downgraded or, as in the case of the CDC, in the event of RFF's status changing.

Though the issues came up four months before financial close, they were only resolved the day before the deal signed.
The project – RFF's first PPP – involves installing GSM equipment on around 14,000km of trunk lines and will follow on from the 2,000km of line in north-eastern France that RFF installed with its own resources as a pilot for the roll-out of the technology on a national scale.

RFF's attention will now turn to two other large rail projects – the LGV Sud Europe Atlantique high-speed rail line and the Charles de Gaulle Express. The former, a Eu8 billion deal, is expected to be awarded in late March. The latter, which was won by a Vinci-led consortium in July, may take longer to close, as it involves urban construction and demand risk.

GSM-R
Status: Financial close 18 February 2010
Description: Eu1 billion financing of a GSM telecoms system for the French rail network
Awarding body: Reseau Ferre de France
Sponsors: Vinci, TDF, AXA, SFR
Bookrunner and underwriter: Credit Agricole CIB
Mandated lead arrangers: BBVA, Santander, KfW, BayernLB, Dexia, Credit Agricole CIB, Credit Agricole Leasing, SMBC
Non-commercial lenders: European Investment Bank, Caisse des Depots et Consignations
Financial adviser to the consortium: Royal Bank of Canada
Legal adviser to RFF: Lovells
Legal adviser to the consortium: Freshfields
Legal adviser to the lenders: Allen & Overy
Legal adviser to EIB: Norton Rose
Legal adviser to CDC: Linklaters