The A8 II was the first of the second round of German A-Models to close, and the first German motorway deal initiated after the financial crisis. The challenge on the A8 II’s immediate predecessor, the A5, was salvaging a pre-crisis deal in the months following Lehman’s collapse. The A8 II, by contrast, involved launching a deal in the midst of the crisis, and not knowing what state debt markets would be in when it was time to close the deal.

The 30-year contract entails the upgrading and widening of a 58km stretch of the A8 between Ulm and Augsburg, and then its operation. The federal government collects tolls on heavy goods vehicles using the section, using the Toll-Collect system, and the state of Bavaria then compensates the project company according to levels of usage.

Unlike the previous A Models, whereby payments to the project company varied according to each vehicle’s environmental category, the A8 has a flat rate, with payments based on the average toll per heavy goods vehicle using the road. Under the previous system sponsors ran the risk of a higher proportion of more environmentally friendly trucks using the stretch of motorway, leaving it with lower payments despite higher traffic levels and their associated operations and maintenance costs.

The rate at which the project company would be paid was subject to competitive bidding, although this rate is then escalated according to an index set by the authority. The project is a real toll road, in that the sponsors are exposed to heavy goods vehicle drivers’ willingness to pay tolls. It is a shadow toll road, in that the project company does not collect tolls directly, and has no control over the rate charged to drivers. The federal government could, in theory, raise the rate at which tolls are collected, but this constitutes a compensation event for the sponsors.

The road is a brownfield concession with good traffic levels. Although there have been changes to the surrounding road network since the tender launched – most notably the completion of the A8 I in October and other alternative routes since – banks had confidence in the road’s track record.

The motorway authority for southern Bavaria, Autobahndirektion Sudbayern, qualified four bidders for the project in spring 2009: Bilfinger Berger/John Laing, advised by PwC; Hochtief/Strabag, advised by UniCredit; Royal BAM/Vinci, advised by Deutsche; and EGIS/Porr, advised by Macquarie. Financial advisers at this time faced the difficulty of structuring bids even though the support of the European Investment Bank was not yet assured.

The motorway authority asked bidders to revise their offers to reflect falling costs at the beginning of 2010, and then shortlisted the Hochtief/Strabag and Bilfinger Berger/John Laing consortiums in May. By this point the EIB had confirmed that it would lend to the project, and both bidders had the backing of a number of commercial banks.

The two bidders submitted best and final offers in September, and long-term supporter BBVA was the only commercial bank supporting Hochtief/Strabag at this stage. A number of banks backed away from the deal; some thought that margins were conservative but the structure was too aggressive, whereas others believed precisely the opposite.

The Hochtief and Strabag bid narrowly beat Bilfinger Berger and John Laing at the BAFO stage; by gaining 96.39 points to the loser’s 96.25 points. The narrowness of the victory led Bilfinger and Laing to launch a legal challenge, first to the South Bavarian procurement review board and then to the regional high court in Munich. The two losing bidders asserted that the rating criteria were changed during the tendering process and the authority assessed areas superfluous to the delivery of the eventual contract.

The regional court dismissed the challenge in April, and Hochtief/Strabag had a tight two-month window to close the deal. The deal closed on 31 May through Eu298 million ($422 million) in senior debt, arranged by UniCredit, BBVA, the European Investment Bank and L-Bank. The EIB provided half of the debt, Eu149 million, with a 28-year tenor. The commercial tranche runs for a year less, and is comprised of Eu62 million from BBVA, 76.8 million from UniCredit and Eu11.2 million from L-Bank. Both tranches rank parri passu.

The EIB also provided a loan guarantee for TENS transport (LGTT), a guarantee instrument for transport projects that gives lenders a potentially subordinate buffer against traffic revenue risk. The A8’s Eu59.6 million LGTT is close to the instrument’s 20% of senior debt cap, and runs for four years post-construction. Although the deal features only volume risk, rather than toll revenue risk, commercial banks felt that without the LGTT they would have been forced to offer far more restrictive terms.

The financing features Eu75 million in equity split equally between the sponsors, meaning the project has an 80/20 debt/equity ratio. The federal government is also providing a Eu75 million grant to support initial construction costs.

Margins on the deal are fairly generous, starting at 270bp over Euribor, and rise to 320bp through a series of step-ups. The pricing was set at the BAFO stage, and a source close to the deal believes that margins would have been 30bp lower if it was priced at the time of close. Although not a soft miniperm in the strictest sense, the pricing step-ups are coupled with an increasing cash sweep to encourage refinancing. The minimum debt service coverage ratio is a healthy 1.4x.

The next deal in the A Model pipeline – the A9 – features a shorter concession length, just 20 years, and is the first availability payment-based A Model. Payments will be performance-based and paid monthly throughout the term of the contract. This includes remuneration for long-term private financing and for operations, maintenance and other services. The project company will receive capped partial milestone payments during the construction phase, equivalent to a maximum of 85% of construction costs. Long-term private financing will provide the remaining 15% of construction costs. A Vinci/BAM consortium is vying with Max Boegl for the Eu300 million deal and best and final offers are expected in third quarter of 2011.

A8 II
Status: Financial close 31 May 2011
Size: Eu448 million
Location: Germany
Description: Upgrading of a 58km stretch of motorway.
Grantor: Autobahndirektion Sudbayern
Sponsors: Hochtief and Strabag
Debt: Eu298 million
Lenders: UniCredit, BBVA, L-Bank, EIB
Sponsor legal adviser: Freshfields
Sponsor financial adviser: UniCredit
Lender legal adviser: CMS Hasche Sigle
Grantor financial adviser: Investitionsbank Schleswig-Holstein
Grantor legal adviser: Norton Rose