The first project financing for an Italian roads concession should inspire repeat deals in the country, especially given a regulatory regime that should make brownfield concessions with strong enough fundamentals easy to finance. Other governments looking to send road concessions to market should look to the Strada dei Parchi for ideas. Whether it will do any of the above will depend mostly on the presence of sufficient political will in Italy and its neighbours.

Toto and Autostrade bought the Strada dei Parchi concession, which has been in operation for over 30 years, in 2003. The two had run the concession since then at a loss, unable to recover what they had spent on improving the road, and unable to agree a supportive regulatory framework with the Italian national road manager, ANAS. The new mechanism for recovering costs is based on the ability to raise toll levels, and depends upon demand for the road being inelastic.

Strada dei Parchi holds the concession for the 166.5km A24 (Rome-Aquila-Teramo) and 114.9km A25 (Torano-Avezzano- Pescara) highways, which run east-west across the Italian peninsular, through both the Italian capital, and the Italian spine. Finding a competing free route to get between the Tyrrhenian and Adriatic coasts requires considerable ingenuity. With an end-to-end toll of Eu13, circumventing it was barely worthwhile, and even after the sponsors settled with ANAS, that toll now stands at Eu32.

Tolls are set with reference to inflation, the condition of the road, the required increase needed to recover capital expenditure, and the existing regulated asset base. The effect of the toll-setting mechanism is to ensure that the project company earns a consistent – at least in the medium term – rate of return. Only in instances of extreme elasticity, where tolls have to be increased so rapidly to make up for shortfalls that drivers eventually give up on the route, would the formula create worries for lenders.

The other main causes for lender concern in the concession structure are termination risk and construction risk. Lenders had to be comfortable that the indemnity payable by ANAS under the new regime, which fell short of a full state guarantee, would be as strong as under the old regime. Toto also had to convince lenders that it had the resources to protect lenders from cost overruns, even though it would have to tender construction contracts for third parties to compete under Italian law.

The negotiations with ANAS started from the principle that the concession required considerable construction work to remedy the effects of the 2009 earthquake. Given the Eu500 million upfront construction costs and Eu23-30 million per year in operations and maintenance costs that the concession required, Toto was able to negotiate a return rate of 9.71%. The state is also paying the concession company directly to complete some works on a toll- free route into Rome, a Eu220 million project.

The sponsor originally mandated Dexia Crediop and Société Générale as coordinators of the Eu570.5 million debt financing for the project, and the two banks remain the hedging coordinators on the financing. The arranging group eventually expanded into a club of seven, by incorporating BIIS, ING, MPS, UniCredit and WestLB as mandated lead arrangers. The debt priced at 275bp over Euribor, with Cassa Depositi e Prestiti providing Eu150 million of the total, and Sace covering Eu50 million of SG’s Eu90 million commitment.

The 17-year debt breaks down into a Eu280 refinancing tranche, which takes out a bridge from the two leads, as well as earlier contributions to the concession, a Eu200 million loan to fund new expenditure, a Eu40 million standby facility, a Eu30 million working capital facility that can offer advances against toll receipts, and a Eu20.5 million performance bond that is used to satisfy the project company’s obligations to ANAS.

The deal closed in February, well in advance of the latest bout of turmoil in the market. For the project, the major development has been Toto’s gradual accumulation of a 98% share from Autostrade, with the remaining stake set to change hands shortly. Signs of progress in the Italian market have been scant since then, as debt market conditions worsened, and the Italian government’s borrowing costs have soared.

Early in 2011, it was possible to see Strada dei Parchi as a useful template for brownfield toll concessions, provided sponsors could be certain than ANAS would renew their concessions. Greenfield sections looked much less promising, and the Italian government, despite being in the throes of an austerity programme, has suggested that a de facto availability roads programme.

But rising funding costs will complicate negotiations with ANAS, because debt pricing feeds into the rate of return that sponsors agree with ANAS. The sponsors on Strada dei Parchi managed to hedge 80% of its debt at an effective rate of 3.2%, close enough to the assumptions it used in its negotiations with ANAS. All-in rates of nearer 6% would make it much harder to find a regulatory equilibrium.

But the regulatory asset-based regime has something to offer other cash-strapped governments with proven toll assets in need of maintenance and comparatively project lending market. At present that is a small list. Governments elsewhere have offered more direct support for concession revenues, often coupled to variable-length concessions, though such obligations might be too visible in government accounts. “I think for brownfield concessions, sponsors will embrace the structure,” says Fabio Fritelli, Toto’s chief financial officer. “It gives you a clearer picture of what your returns will be.”

Strada dei Parchi SpA
STATUS: Closed 25 February 2011
SIZE: Eu700 million
DESCRIPTION: Refinancing and construction financing for 231.4km of sections of the A24 and A25 in Italy
SPONSORS: Toto Costruzioni (98%) Autostrade (2%). (Split was 40/60 at close)
DEBT: Eu570 million
ORIGINAL MLAS AND JOINT COORDINATORS: Dexia Crediop, Société Générale
HEDGING COORDINATORS: Dexia Crediop, Société Générale
MLAS: BIIS, Cassa Depositi e Prestiti, ING, MPS, UniCredit and WestLB (SACE was a guarantor on a portion of facility B)
LENDERS’ LEGAL COUNSEL: Legance
LENDERS’ TECHNICAL ADVISER: Steer Davies Gleave
INSURANCE ADVISER: Marsh
MODEL AUDITOR: PwC
SPONSOR LEGAL COUNSEL: Chiomenti