The financing for the Tours-Bordeaux high-speed rail PPP, has proved a real test to France’s maturing PPP market, following Vinci’s selection as preferred bidder in March 2010. The owner of the French rail network Reseau Ferre de France (RFF) had planned to reach financial close by 31 December at the latest, but marshalling the complex mix of state subsidy and guarantees with both multilateral and commercial debt has seen the process spill over into 2011.

There is a general consensus that RFF has bitten off more than it can chew for its first proper HSR tender. The deal is not only notable for its unprecedented size, around Eu8 billion ($11.3 billion), but also for eschewing the usual availability-based Dailly mechanism in favour of demand risk.

Grantor and lenders are now tentatively putting forward 15 June as the expected date of financial close. Commercial banks are lending around Eu3.2 billion to the project, with the Caisse des Depots et Consignations lending Eu760 million and the European Investment Bank Eu600 million. CDC will also contribute equity towards the project, along with the two other sponsors Vinci and AXA, with total equity set to come in at around Eu800 million.

A possible problem on the sponsor side stems from the fact that RFF’s initial contract with Vinci lapsed on 28 February. Although most lenders involved in the deal expected a straightforward contract extension, RFF and Vinci are thought to be renegotiating some terms of the contract, leading to speculation in the French press that Vinci has been trying to claim Eu60 million extra from RFF to account for the rising cost of raw materials.

RFF and Vinci have neither confirmed nor denied these reports, but lenders on the deal are sceptical that is there much substance to the claims. “The claims about Vinci would be very surprising if true,” said a lender involved in the deal, “Everything was set at the BAFO stage, so I don’t see how it could be renegotiated anyway. Besides which, RFF and Vinci will have an ongoing relationship during future projects and neither of them would want to sour this.”

RFF has offered a host of guarantees to the various lenders to ensure financial close. About a third of the commercial debt and two-thirds of the EIB debt will be covered. Most crucially, CDC would not be able to lend to the project without an RFF guarantee. On top of these RFF guarantees, the EIB is also providing a Eu400 million LGTT, a guarantee instrument for transport projects that provides lenders with a potentially subordinate buffer against traffic revenue risk during a project’s first five to seven years of operation.

The remaining project costs after the debt and equity contributions will come from a series of state and local government subsidies administered through RFF. Getting approval for these subsidies from the various regional councils has caused significant delays for the project. For example, Ségolène Royal, president of Poitou-Charentes’ regional council, has refused to approve her region's Eu257 million subsidy, creating another block on proceedings.

Royal’s stance has been widely dismissed as political posturing, but the arrest of IMF head Dominique Strauss-Kahn, a front-runner for the Socialist Party's presidential nomination, has thrown her back into contention for the socialist nod. As much as Royal may be adding further complications to a project already fraught with difficulties, she does not have the power to derail the project entirely.

“She will most likely make the contribution in the form of subordinated debt rather than a subsidy,” said one banker involved in the deal, “and even if she chose not to contribute anything, all subsidies go through RFF which will front any missing scraps here and there itself. Although RFF will do this to make sure the project closes, it has been coy about its capacity to do so as it hasn’t wanted to give others an incentive to drop out as well.”

In contrast to the turbulent situation on the public side, commercial bank support is solid. Credit Agricole, BNP Paribas, Societe Generale and Santander are the project’s initial mandated lead arrangers, and joining them are five additional MLAs - Dexia, BBVA, SMBC, UniCredit and Mediobanca. Ticket sizes have already been set. The three initially mandated French banks are putting in for Eu450 million apiece, Dexia and BBVA Eu400 million each with the remaining banks holding tickets of around Eu300 million.

Although the project carries demand risk for the lenders, banks have been given some comfort by the fact that the project is a brownfield concession, covering an existing line with proven demand. A maximum tariff has already been set, but banks carry additional risk in this regard as the French train operator SNCF could choose to set tariffs at a lower level.

The status of SNCF has also caused more general concerns for the lenders, however. The future of the French rail operator is of particular importance to lenders, as they will be lending on a longer basis than a mini-perm financing. “SNCF’s monopoly may make the demand story relatively simple at the moment,” explained one of the project’s lenders, “but we don’t know if this monopoly will last. If the rail sector is privatised, SNCF may have to compete with international operators offering cheaper fares.”

RFF’s future status is also a matter of concern, as it is guaranteeing various parts of the project’s myriad debt tranches. Lenders are seeking assurances that these guarantees will not be affected by a future privatisation of the state railway network owner. This not the first time RFF’s status has caused intercreditor issues, and nor will it be the last. On GSM-R, for example, the EIB and CDC provided junior debt only on the condition that it would rank parri passu with the senior commercial tranche in the event of RFF privatisation or default.

Concerns over future status of both RFF and SNCF should also be placed against the backdrop of longstanding friction between the two agencies. As one banker explained: “There is underlying debate between RFF and SNCF that affects all rail projects, not just Tours-Bordeaux. The two always disagree on how the tendering rules are set, how they share the cost of projects and whether they are using the right procurement model.”