The financing for GSM-R closed in February 2010 with attractively priced commercial debt supported by government and multi­lateral tranches. In the process, it overcame several obstacles, including limited liquidity follow­ing the financial crisis, the insolvency and drawn-out sale of its equipment supplier Nortel, and complex intercreditor negotiations.

The project – French state railway op­er­ator Reseau Ferre de France’s first PPP – involves installing GSM equipment on around 14,000km of trunk lines and fol­lows on from the 2,000km of line in north-eastern France that RFF installed, with its own resources, as a GSM pilot scheme. The GSM digital communication system has no voice or data restrictions, and allows for point-to-point audio calls, SMS text messages and the ability to reach drivers through either their train number or geographical area.

The Vinci/TDF/AXA/SFR consortium was appointed preferred bidder on the 15-year design-build-finance-operate-main­tain concession by RFF in February 2009. Credit Agricole CIB (then Calyon) had already committed to fully underwrite the commercial debt in December 2008, and underwrote the full amount early in 2009.

The deal became complicated when Nortel filed for Chapter 11 bankruptcy protection in early January 2009, a month before the preferred bidder was announced. RFF had named Nortel manda­tory equipment supplier and it could not, therefore, be replaced.

Late-stage bidders 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.

The sales took 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.

The Eu566.5 million ($775 million) 14-year commercial debt package was lead arranged by sole bookrunner and underwriter Credit Agricole CIB. Credit Agricole provided Eu120 million of this debt, and BBVA, Santander, Intesa, BayernLB, Dexia, and SMBC all came in for just under Eu70 million each. KfW provided around Eu45 million.

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, because it was able to commit to a faster credit approval. ING made a late effort to enter the deal in January, but was unsuccessful. Banks had already been scaled back, and were unwilling to reduce their takes any further.

A Eu407 million construction loan covers a five-year construction period, priced at 250bp over Euribor. On completion, this is then refinanced with an additional Eu107 million for nine more years, leaving a one-year tail on the 15-year concession. This refinancing carries a starting margin of 275bp, rising to 325bp for the final two years. The commercial tranche is completed by a Eu34.65 million 14-year contingency facility, and a five-year Eu17.5 million VAT bridge priced at 130bp.

The EIB provided Eu280 million, and Caisse des Depots et Consignations (CDC), a lending arm of the French state, put up Eu130 million. The two loans benefit from a post-construction dailly guarantee. The dailly tranche backs repayments to the EIB and CDC which in turn come from pay­ments by RFF during the operation period. The financing is round­ed off with a Eu160 million RFF grant and a Eu58 million equity investment from the sponsors.

Lender negotiations were protracted for both the commercial and the dailly tranche, and major issues remained un­resolved until the penultimate day of nego­tiations. The commercial tranche carries more risk than the dailly tranche, and banks felt that it was unfair to rank pari passu with the EIB and CDC. Banks pushed for a senior ranking, but in the end were appeased by an astutely de­vel­oped compromise in which they rank­ed above the EIB and CDC in all but a few specific instances.

Another factor slowing down financial close was the pace of negotiations bet­ween the EIB, CDC, RFF and the spon­sors, which came to a head in September 2009. The CDC and EIB were concerned about any possible future changes to the status of RFF. Should RFF be privatised at any time over the life of the debt, it would be unable to continue repaying the dailly tranche. The EIB and CDC were unwilling to take on this form of default risk, and the sponsors had to give them some level of recourse against the project company in case of default. RFF default is also the main instance in which the dailly tranche ranks pari passu with the commercial tranche.

Negotiations may have been drawn-out, but the resolutions found for the various intercreditor concerns can be deployed in future rail PPPs. The project provides a lesson in how commercial debt can be successfully combined with a dailly tranche for large infrastructure PPPs. Many projects would have been de­railed by even one of the setbacks faced by GSM-R. The com­mit­ment of the RFF, sponsors and lenders ensured financial close in spite of the delays. 

Synerail
Status: Closed 18 February 2010
Size: Eu1.19 billion.
Location: France.
Description: 15-year DBFO contract for a GSM telecoms system on the French rail network.
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 sponsors: Royal Bank of Canada
Legal adviser to RFF: Lovells
Legal adviser to the sponsors: Freshfields 
Legal adviser to the lenders: Allen & Overy
Legal adviser to EIB: Norton Rose
Legal adviser to CDC: Linklaters