The financing for the Tours-Bordeaux high-speed rail PPP has proved to be a real test of 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 for both multilateral and commercial debt has seen the process spill over into 2011.

There is a general consensus that RFF has let its ambitions outstrip its capabilities 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 a 50-year concession that includes demand risk.

Grantor and lenders are now tenta­tively suggesting the deal could close by the end of June. 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.

Topping up Tours

The sponsors’ difficulties stem 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 were thought to be renegotiating some terms of the con­tract, leading to speculation in the French press that Vinci had been trying to claim Eu60 million extra from RFF to account for the rising cost of raw materials.

RFF and Vinci have publicly 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,” says a lender involved in the deal, “Everything was set at the BAFO [best and final offer] 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.”

A source on the public side, however, admits that there have been elements of renegotiation. As the project’s cost was set during November 2009, RFF was willing to listen to Vinci’s claims, but the eventual outcome was not as blunt as handing over Eu60 million to Vinci. The source explains: “RFF listened to Vinci’s case and in response devised a deal which made everyone happy. The deal involves changes to the payment struc­ture rather than any upfront cash.”

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 the effects of poor demand-based revenues during a project’s first five to seven years of operation.

Royal mess

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 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, and 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 at the start of May, “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.”

The banker’s comments were prescient. Although Royal offer­ed a Eu95 million loan to the state, the government reject­ed the offer and decided to put up the missing subsidy itself. The public sector source hinted that the state will punish Royal for her defiance, and French financial daily Les Échos has claimed that Prime Minister François Fillon is plan­ning to recoup the money by reducing grants to the region.

Lenders look to SNCF

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 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 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 debt. Lenders want 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 the 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.”

Bretagne-Pays de la Loire

In comparison to the numerous hurdles faced by Tours-Bordeaux, RFF’s second major HSR project, the Eu3.4 billion Bretagne-Pays de la Loire line, is a rather more straightforward proposition. Most significantly, the deal features no elements of demand risk, instead relying on the Dailly mecha­nism that has become the bread and butter of French PPP.

That is not to say the deal has been without surprises. Bouygues was wide­ly considered to be shoe-in for the 25-year deal, as it held the largest number of exclusive com­mitments with banks. Eiffage, however, undercut Bouygues’ cost by 15% at the BAFO stage on the basis that construction would take six months longer, leading RFF to select the smallest of “the big three” as preferred bidder even though it had support from a single bank, BBVA.

To make up the shortfall, RFF stipu­lated that a funding competition had to take place, and Eiffage approached 25 banks to gauge interest. This com­petition drew to a close earlier this month with BBVA, Societe Generale and Santan­der appointed as structur­ing banks, and nine other banks man­dated: BTMU, BayernLB, DzB, ING, KfW, Mizuho, SMBC, Unicredit and Credit Mutuel.

The international banks’ strong appetite for the project allowed Eiffage and its financial adviser La Compagnie Benjamin de Rothschild to be aggressive in its terms and struc­turing. The small number of French banks on the pro­ject, SocGen being the only major participant, highlights how keen the terms were. The major French institutions were mainly put off by what they considered to be an insufficient security package, with one French lender complaining about the lack of performance bonds, in particular. Many French banks only made a cursory effort to pursue the project and Credit Agricole, for example, did not even put in an offer.

The funding competition has been a boon to the state, how­ever, as it has driven down the deal’s debt margins sub­stantially. “Although Eiffage only had the backing of one bank at the BAFO stage, this made for a very efficient fund­ing competition,” explained the public sector source, “In con­trast, Vinci already had significant financing in place at this stage, meaning that margins had already largely been set. We considered the margins to be high, but were ultimately obliged to accept them.”

Commercial debt covers about Eu1 billion of the project costs, with Eu400 million coming from the EIB and CDC. Although there had been talk of the EIB taking on construction risk, the project will now follow the same structure as GSM-R, with the EIB and CDC’s contribution fully sup­port­ed by the Dailly mechanism. RFF has imposed a 65% cap on the project’s Dailly tranche, as is the case with all of its projects, and none of the commercial debt will be in­cluded in this Dailly tranche. The RFF is also resurrecting GSM-R’s parri passu clause for the CDC and EIB, mini­mis­ing intercreditor issues.

The remaining Eu2 billion in project costs will come from public grants, split 50-50 between state and local government. The local cash will mainly finance the project during the construction period and the state during the operation phase. Unlike Tours-Bordeaux, there have been no problems in gaining support from the provincial councils, as there is a lot of local support for the project. Given the deal’s relative simplicity, the project’s lenders are expecting financial close by July. At this point all attention will shift to the final high-speed line in the current pipeline, Nimes-Montpellier.

Nimes-Montpellier dialogue starts

RFF launched a competitive dialogue for Nimes-Montpellier in Febru­ary. The process was originally scheduled for Decem­ber 2010, but was pushed back following the death of the former presi­dent of the Languedoc-Rousillion region, Georges Freche.

The Nimes-Montpellier line will form a bypass to an exist­ing line between the two cities. Although the two cities are already linked, nearby high-speed rail connections bet­ween Spain and France mean that forecasts predict congestion on the conventional line if the bypass is not built. The line will also carry both high-speed passenger trains and freight trains, a first for RFF’s rail tenders.

RFF is following the Bretagne model for this final HSR project, using a standard PPP framework backed with avail­ability payments through the Dailly mechanism. The project has a 25-year concession length, although bidders can choose to extend this to 45 years as part of their offer. The project is also the smallest of the three, at around Eu1.5 billion.

Unsurprisingly, the three bidders are Vinci, Eiffage and Bouygues. The general consensus in the market is that Bouygues will be awarded the project, as it is not currently tied up with the other two deals. The public sector source, however, was keen to point out that the decision is by no means a fait accompli. “The outcome is always surprising on the big deals,” the source said. “Very few people expected Vinci to get Tours-Bordeaux and nobody was even mentioning Eiffage before BPL.”

Best and final offers are due shortly for the project and RFF expects to select a preferred bidder by January 2012. With a general election due in April or May, RFF is keen to make sure this timetable does not slip.

RFF has no further high-speed rail lines in the pipeline. The agency is, however, planning to tender a new train station at Montpellier either as a commercial concession or as a PPP. RFF will finalise its plans once the three big deals are out of the way, but it cannot be too leisurely, as the station will have to be open in time for the opening of the new Nimes-Montpellier line in 2016.