Rota das Bandeiras’ sale of R1.1 billion ($659.1 million) in bonds to refinance the 278.5km Dom Pedro I toll road concession was the first non-recourse project bond for a toll road in Brazil. As such, it is a landmark both for the country’s transport market and its bond market. The deal opens the door to a much-needed new source of funding for road and other infrastructure borrowers.

BNDES, the state development bank and the traditional lender to domestic pro­jects, estimates that Brazil needs roughly $145 billion in infrastructure investment over the next four years, but that it can only finance a portion of this amount. With its bond issue, Rota das Bandeiras, made up of Odebrecht subsidiaries Ode­brecht Investimentos em Infra-Estrutura (60%) and Odebrecht Servicos de Engen­haria e Construcao (40%), demonstrates that the country’s bond market is open for infrastructure assets.

Banco Santander (lead), Banco do Brasil, Banco Itau and Banco Bradesco under­wrote the R1.1 billion issue. It was split into two senior secured tranches of R550 million each and maturing on 15 January 2022 and 15 July 2022, respectively. The first has a two-year grace period and is priced at 9.57% over Brazil’s consumer price index (IPCA). The second has a grace period of 2.5 years but the same pricing.

The issue was originally for R815 mil­lion but, because of strong investor in­terest, the underwriters exercised their greenshoe options and increased it to the final size. The move allowed the sponsor to fully repay the R1.1 billion bridge loan used to finance initial construction in April 2009. The notes have 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).

The highway’s limited track record as a toll road is the most significant risk faced by investors, according to Moody’s report. But Moody’s added that the metropolitan 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. The corridor is expected to handle 83 million vehicles this year.

Lucas Cive, chief financial officer of Rota das Bandeiras, says he hopes that two things will result from the deal. One, that regulators will reduce the amount of red tape necessary to close capital markets debt issues for infrastructure and, two, that more deals will occur, thus reducing all-in cost of financing because of in­creased volume. He says both are needed to see bond debt become a competitive alternative to BNDES loans for infrastructure.

The development bank notably shared a pledge of the concession pari passu with bond holders, a first in the country, when it lent the project company R921.5 million to finance the six-year capital investment phase of the concession. The loan is divided in 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.

Dom Pedro I is a 278.5km toll road in the interior of Sao Paulo state, connecting Campinas to the Paraiba valley. The total project is estimated to cost R1.34 billion. Under the terms of the concession agreement, the project company is responsible for improving and maintaining the highway, including widening roughly 53km to four lanes from two and building a new 18.5km extension. It has also built seven new toll plazas, replacing the existing two, to recoup its investment in the road, and will collect tolls directly. Expansion and improvements are 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 – the east and west sections of the Marechal Ron­don, the Raposo Tavares and the highway between Ayrton Senna and Carvalho Pinto – tendered at the same time.

Odebrecht offered the lowest basic toll rate and was awarded the 30-year concession on 9 February 2009. Commercial close took place on 2 April 2009. As is common in Brazil, the concessionaire used the 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 bond 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 did not lend at this stage because it can only lend to cover capital costs, and not concession fees.

“The financing showed the market that it is possible to finance infrastructure with a source other than BNDES,” says Cive. BRVias’ 417km Marechal Rondon Oeste and SPMar’s 104.9km Rodoanel sul and leste toll road concessions, as well as the Rio de Janeiro to Sao Paulo high speed rail, are all projects in the pipeline that could tap Brazil’s debt capital markets for infrastructure funds.