The close of Italy’s first project financing for a road concession, Strada dei Parchi, could at last signal a wave of Italian road PPP deals. Strada dei Parchi not only shows that the new regulated asset base model for toll roads is bankable, it also finally demonstrates that there is a credible road fin­ance structure beyond general contractor schemes in Italy.

A club of seven commercial banks, as well as state-owned savings bank Cassa Depositi e Prestiti and Italy’s export credit agency SACE, signed a Eu570.5 million ($788.9 mil­lion) debt financing for Strada dei Parchi on 25 February.

The Eu570.5 million debt financing has a tenor of 17 years with a three-year operational tail, is fully amortising and comprises five tranches:

• Facility A of Eu280 million that refinances existing activities;

• Facility B of Eu200 million;

• Standby facility of Eu40 million;

• Revolving working capital facility of Eu30 million;

• Performance bond facility of Eu20.5 million that the concessionaire assigns for the benefit of grantor ANAS.

Dexia Crediop and Societe Generale led the deal and provided a Eu180 million bridge loan. Joining them in the long-term deal are BIIS, ING, MPS, UniCredit and WestLB. SACE is covering Eu50 million of SG’s Eu90 million com­mitment and Cassa Depositi e Prestiti has provided a Eu150 million commitment. The European Investment Bank could join the financing using its intermediary provisions to lend to CDP. The EIB’s participation would decrease the facility size by around Eu5 to Eu7 million by reducing the margins on the debt.

The average all-in debt margin is 300bp over Euribor, with the margins increasing over time. The debt-to-equity ratio is in the range of 75:25, the minimum debt service cover ratio is a healthy 1.4x and the loan life coverage ratio is 1.6x. The average life of the loans is around 12 years.

The project company, Strada dei Parchi, owns the con­cession to build, operate and collect tolls on the 166.5km A24 (Rome-Aquila-Teramo) and 114.9km A25 (Torano-Avezzano-Pescara) highways. The two highways are the connection between the Tyrrhenian and Adriatic coasts of the peninsula. Proceeds from the financing fund the concessionaire’s 2011-2013 industrial plan, which includes new investment and supplementary maintenance costing a total of Eu343 million. The maintenance costs over the life of the concession are Eu557 million.

New rules, new risks

There were four principal challenges to putting together the financing. Firstly, with no other Italian roads concessions pro­ject financed to date, lenders are typically used to pro­vid­ing corporate loans to large concessionaires such as Atlantia (formerly Autostrade) with debt to equity ratios of around 60/40, a more normal metric for a utility borrower.

Secondly, lenders had to mitigate construction risk. Under Italy’s interpretation of EU law the concessionaire needs to put the rolling construction contracts out to public tender. The sponsor, Toto Costruzioni, agreed to a structure under which it agrees to meet any cost overruns beyond a certain level. This turns the lenders’ exposure into the equivalent of a lump-sum turnkey contract.

The third challenge was that the ownership of the concessionaire changed part of the way through the financing process. Strada dei Parchi’s sponsors were originally Atlantia (60%) and Toto Costruzioni (40%) and it is a legacy con­cession that was renewed to the end of 2030. During the structuring process Toto agreed to buy all of the equity in the company. The financing was a condition of the equity transfer, and approval from ANAS and antitrust authorities were conditions of the financ­ing. Given the equity transfer, banks had to get comfortable with the medium-sized Italian construction company, Toto (which is in any case one of the construction contractors that Atlantia uses most on its net­work), as controlling shareholder, as opposed to Atlantia, the largest toll road operator in the world.

The fourth challenge was that the project falls under the new regulated asset-based concession model that was put in place by Italy’s government in 2007. As the project was progressing towards financial close in September 2010, with some banks already committed, CIPE (Interministerial Committee for Economic Planning) revised its position regard­ing termination liabilities. It removed the ANAS take-over provision, which was a combination of a termination indemnity paid by ANAS and its assumption of the concessionaire’s net financial liabilities in case of early termination of the concession.

Under the new model, upon early termination of the concession ANAS would indemnify the concessionaire and lenders with a termination payment. Whereas under the old regime banks had accepted ANAS’s guarantee as a state guarantee, the new indemnity payment method required legal due diligence as well as a restructuring of the initial base case in order to achieve an acceptable termination value to net debt ratio, a process that delayed financial close by five months.

The regulated asset based model is commonly used in the regulation of utility companies to ensure that private companies do not profit unreasonably from the provision of a public good. A ceiling for tariffs is determined depending on the capital expenditure of the project. It is the first time a profit cap has been used on a fixed-duration motorway con­cession anywhere (Portugal and Chile have used variable-length, net present value-based concessions for roads).

The new regulatory framework introduced a new formula for the tariff calculation. In Strada dei Parchi case, the tariff calculation formula can be summarized as follows:

ΔT = ΔP – X + K + Q

Where:

ΔP is the annual inflation rate annually assumed by the Italian Government

X is a parameter, determined every five years (at the begin­ning of each regulatory period) that sets to zero the delta between the present values of eligible costs and the present value of the expected revenues. Eligible costs include the allowed return on the existing RAB; K is a tariff parameter determined yearly which remunerates the investments com­pleted in the previous financial year (new RAB);

Q is the quality parameter that can be positive or negative depending on the condition of the road surface and the global accident rate.

The regime places a lot of power with ANAS. ANAS nego­tiates with the concessionaire for each project the projected internal rate of return for the sponsors that is pre­served through a five-yearly equilibrium mechanism de­pend­ing on the toll receipts. The new tariff comprises a profit cap that maintains the difference between allowed costs and allow­ed revenues, with any surplus handed over to the public purse. It also comprises a yearly cost para­meter allowing the conces­sionaire to recoup investments in the previous financial year.

Offsetting the profit cap, the new regime removes a large portion of traffic risk but places the cost of delays in con­struction on the concessionaire from the time of regulatory approval – a fairly sizable risk given the length of time to close projects and the potential for inflation in engineer­ing, procurement and construction contract prices. Any in­come from roadside services, which was was potentially an addi­tional source of profit under the old regime, will be added into the allowed revenues. On Strada dei Parchi, for in­stance, there is marginal income from the rent of petrol stations.

The new regime should be more easy to finance because sponsors and lenders are not taking naked traffic risk for the life of the concession and are mostly exposed to performance risk and escalating operating cost risk beyond allowable costs.

Where lenders and sponsors are most exposed is on a severe downside scenario where the traffic is far lower than projected by ANAS. In such a scenario demand for the toll road could be so elastic that a bad loop is created at the five-yearly equilibrium points of higher tariff and lower traffic and eventually to too few vehicles travelling at the greatest allowable tariff. This problem is most severe for greenfield toll projects, so it is no surprise that Strada dei Parchi is a brownfield project with several years of traffic and toll data, showing an extremely limited elasticity of traffic demand in response to changes in tariffs, GDP or oil prices.

Much work still to be done

Many of the concessions due in the rest of 2011 face more challenges than Strada dei Parchi. Lenders can either focus on new greenfield pro­jects with long-dated concession contracts, but which have no traffic data and are therefore much more prone to traffic model risk, and legacy concessions with proven traffic that require funding for large capital expenditures but with only a short period remaining on the concession. Lenders there­fore have a choice of whether its is better to take concession renewal risk or greenfield traffic risk.

The Friulia-led Autovie Venete is an example of a legacy concession – it expires in 2017. Banks are currently consider­ing Eu1.8 billion ($1.3 billion) debt backing its A4 Venice-Trieste highway widening programme. Given the large sum of capital involved and the short time to recoup the cost through tolls, a large equity balloon will be paid to the sponsors by the awarding authority or by way of a purchase price from a new concessionaire. Financing these balloons has proved difficult given the state’s refusal to directly guar­an­tee their payment and the reluctance of CDP to guarantee payments using its FGOP provisions.

An alternative to a balloon, where work is required but the concession is nearing its end is for the concessionaire to renegotiate an extension or new concession with ANAS. This is likely for the Torino-Ivrea-Valle D’ Aosta (expiring in 2016), Autostrade del Brennero (expiring in 2014), Auto­strade Meridionali (expiring in 2012) and Autostrade Centro Padane (expiring in 2011).

Some projects, however, combine both these most chal­lenging aspects – a greenfield project with a balloon. This is the route chosen for the BreBeMi (Brescia, Bergamo and Milan motorway) project, whose 19.5-year concession leaves insufficient time for the toll receipts to recoup the capital cost of the works. BreBeMi, which is sponsored by Intesa Sanpaolo (of which BIIS is a subsidiary) and Autostrade per l’Italia, together with 25 other regional private and public shareholders, was also cursed with falling under the old concession regime, then swapping to the new regime and also with connecting to the delayed Milan ring road (TEM).

Many of the older projects are going through the process of agreeing new terms with CIPE to account for higher debt funding costs. So while Strada dei Parchi proves that the regu­lated asset base model is bankable and has settled the ter­mi­nation issue, financing lead times are likely to remain long.

While the new model it will stop sponsors from reaping excess profits on toll receipts, the balancing mechanisms do not entirely remove traffic risk from lenders. Still, it is diffi­cult to call the new model anything more than back-door means of circumventing Italian law’s prohibition of paying availability payments to road concessions. Either toll roads have to stand on their own economically, or they require upfront grants or back-end balloons to improve their fundamentals. 

Strada dei Parchi SpA
Status: Closed 25 February 2011, drawdown due in March
Description: Eu570.5 million debt financing for Italy’s first project financed road concession
Sponsor: Autostrade per l’Italia; Toto Costruzioni
Original mandated lead arrangers and joint coordinators: Dexia Crediop, Societe Generale
Hedging coordinators: Dexia Crediop, Societe Generale
Lenders: BIIS, Cassa Depositi e Prestiti, ING, MPS, UniCredit and WestLB (SACE was a guarantor on a portion of facility B)
OMLAs’ and lenders’ legal counsel: Legance
OMLAs’ and lenders technical adviser: Steer Davies Gleave
Insurance adviser: Marsh
Model auditor: PwC
Sponsor legal counsel: Chiomenti