When Rota das Bandeiras launched R815 billion ($446 million) in project bonds to refinance its debt on the Dom Pedro I corridor concession, investor demand for an infrastructure-backed non-recourse project bond in Brazil was untested. The bonds’ underwriters exercised their green shoe options and sold R1.1 billion in bonds, enough to pay back the entire bridge loan used to pay for the concession. Given the test’s positive results, the door looks open for infrastructure sponsors to tap the debt capital markets in Brazil.

The refinancing, structured by underwriters Banco Santander (lead) and Banco do Brasil, Banco Itau and Banco Bradesco, was the first non-recourse project financing for a toll road in Brazil. The senior secured notes were issued in two R550 million tranches, the first maturing on 15 January 2022 and the second on 15 July 2022. Series one has a two-year grace period and are priced at 9.57% plus the variation of Brazil’s consumer price index (IPCA). Series two has a grace period of 2.5 years and carries the same coupon. The issuance has an initial debt service coverage ratio of 1.3x, rising to 1.4x by maturity. Moody’s rated the bonds Ba1 (global scale) and Aa2.br (national). BNDES, the national development bank, notably shared the guarantee pari passu with bond holders.

Dom Pedro I is a 278.5km toll road in the interior of Sao Paulo state, connecting Campinas to the Paraiba valley. Serving an area with a population of roughly 2.4 million, the corridor, also known as SP-065, is expected to handle 83 million vehicles this year, according to Moody’s. The rating agency cited the highway’s limited track record as a toll road as a risk faced by investors, but said the region’s strong economic prospects should drive traffic increases in line with Brazil’s economic growth, estimated at 4% to 5% annually, during the next 10 years.

Under the terms of the concession agreement, Rota das Bandeiras is responsible for improving and maintaining the highway, including widening approximately 53km to four lanes from two and building a new 18.5km inter-urban extension. The project company has also built seven new toll plazas, replacing the existing two, to recoup its investment in the road. It collects tolls directly. Expansion and improvement of the road is due to be complete by 2016 and cost R1.2 billion.

ARTESP (Agencia de Transporte do Estado de Sao Paulo), the state’s transportation and concession authority, put the Dom Pedro I concession out for bid in October 2008, following the successful tendering of the Rodoanel Oeste to CCR in March of the same year. Modelled on the earlier concession, the winner would pay a large upfront payment to the government and be selected based on the lowest toll offered. Dom Pedro I was one of five road concessions tendered at the same time. The others included the east and west sections of the Marechal Rondon, the Raposo Tavares and the highway between Ayrton Senna and Carvalho Pinto.

Rota das Bandeiras, a consortium consisting of Odebrecht Investimentos em Infra-Estrutura (60%) and Odebrecht Servicos de Engenharia e Construcao (40%), offered the lowest basic toll rate and was awarded the 30-year concession for the Dom Pedro I highway on 9 February 2009. Commercial close took place on 2 April 2009. As is common in Brazil, the concessionaire used a R1.1 billion bridge loan and R240 million of its own equity and existing toll revenues to pay ARTESP the R1.34 billion concession fee. The authority requires 20% be paid within two days of commercial close and the balance within 18 months – a period too short to assemble a debt offering in the country.

Banco Santander, Banco do Brasil, Banco do Nordeste, Banco Votorantim and HSBC provided the fully amortising 18-month bridge loan. BNDES, which typically dominates infrastructure transactions in Brazil, did not lend at this stage because it can only lend to cover capital costs and not concession fees.

In addition to BNDES’ shared guarantee with investors in the bonds, a first in the country, the development bank lent the project company R921.5 million to finance the six-year capital investment phase of the concession. The loan is divided into three tranches, each with a 2.5-year grace period and 12-year maturities, fully amortising in 2022. R737.2 million of the loan is priced at 232bp over the TJLP and R184.3 million is priced at 9.8% plus IPCA.

Rota das Bandeiras is the first true project bond financing for infrastructure in Brazil – although Petrobas raised $834 million for its Nova Marlim oilfield with non-recourse bonds in 2001. It opens a new method to financing projects, especially toll roads, in a country that is expected to be an economic powerhouse during the coming decade. In the words of Lucas Cive, chief financial officer of Rota das Bandeiras, the deal was a “milestone”. Road projects in the pipeline, including Sao Paulo’s Rodoanel Sul and Leste toll road concession, can now turn to local bonds as a viable concession funding option.

Rota das Bandeiras
Status: Closed 30 July 2010
Size: R1.34 billion ($761 million)
Location: State of Sao Paulo, Brazil
Description: Refinancing to repay bridge loans used to acquire a 30-year PPP to improve and operate 278.5km of toll road
Awarding authority: Agencia de Transporte do Estado de Sao Paulo (ARTESP)
Sponsor: Odebrecht
Equity: R240 million (includes the sponsors equity and existing cash flow)
Bond debt: R1.1 billion
Bond arrangers: Banco Santander (lead), Banco de Brasil, Banco Itau and Banco Bradesco
Construction loan: R921.5 million
Loan provider: BNDES
Traffic adviser: Encontec
Sponsor legal counsel: Veirano
Lender legal counsel: Souza, Cescon, Barrieu & Flesch