The Ps19 billion ($442 million) financing for the Tarlac-Pangasinan- La Union Toll Expressway (TPLEX) is the first PPP project in the Philippines to feature an all-domestic cast of sponsors and lenders. The Ps11.5 billion debt financing is likely to serve as a benchmark for the Philippines’ ambitious slate of PPP financings, in a variety of transport and social infrastructure sectors, and assuage concerns that international commercial and development banks would be needed to make the programme a success.

The debt financing consists of an Ps11.5 billion ten-year loan from BDO Unibank, Development Bank of the Philippines, and Land Bank of the Philippines, of which BDO, the only private lender, underwrote Ps 7 billion. The debt complements Ps4.6 billion of sponsor equity, and a Ps2.9 billion direct contribution from the Philippines’ government, attached to the construction of a particular section of the road, section 3.

The financing is for a greenfield toll project, unlike earlier deals, which involved the rehabilitation of sections of road with an existing history of tolling. It also employed a contractor-led process that essentially involved the project company serving as its own engineering, procurement and construction contractor. But the ownership structure of the project company is likely to evolve as construction advances and dedicated infrastructure owners move to the fore.

The project involves building a new 84km toll road linking La Paz, Tarlac province, and Rosario, La Union province. It connects the Subic-Clark-Tarlac Expressway and the North Luzon Expressway. It is designed to relieve congestion on the parallel MacArthur Highway and serve the tourist destination of Baguio. So, while it is a greenfield section, it serves existing and proven demand, and many of its users, those fed into the road by the two connecting expressways, will already be paying tolls.

The Philippines Department of Public Works awarded the concession to the Private Infrastructure Development Corporation consortium, made up of ten domestic construction firms, in 2007, and the public and private sector signed the concession agreement for the project in 2009. The sponsor group consists of DM Consunji/DMCI (combined 33.29% stake as of the end of March 2012), First Balfour (0.78%), DM Wenceslao (11.67%), CM Pancho Construction (1.56%), RD Policarpio (7%), JV Angeles Construction (0.56%), JE Manalo (2.5%), New Kanlaon Construction (6.62%), EEI Corporation (0.02%), and Rockford Development Corporation (1%) with San Miguel/Rapid Thoroughfares (35%), joining shortly before close.

The bidding departed from earlier transport infrastructure projects, in that the winner was chosen on the basis of the lowest tolls it would accept rather than lowest construction cost. Bidders had to provide letters of interest from lenders rather than underwritten commitments.

Under the 35-year build, transfer, operate concession, the project company will design, build, operate and maintain the road, although the department will have nominal title to the road. The department is also responsible for the acquisition of all rights of way, although the lenders were confident enough in the government’s ability to do so that they funded before it had finished the process. The government provided a performance undertaking to the project company, a general commitment to do everything it could to assist in closing the deal. It granted the bank lenders on the deal step-in rights on the financing, despite holding nominal title.

The financing is a tribute to the increasing confidence of the domestic bank sector in undertaking large infrastructure financings. Previous greenfield toll road financings have lent heavily on the multilateral development banks, though the Ps6.2 billion refinancing of the Manila North Tollways Corporation was an all-local affair, and the Manila- Cavite toll road was refinanced with a $160 million high-yield issue in late 2010.

Both a high-yield issue and multilateral debt were options that the sponsors considered. The revenues of TPLEX are all in Pesos, and given the uncertain timetable attached to winning rights of way, the likely lengthy approvals process and the project’s unorthodox contracting strategy, the sponsors decided to focus on assembling a local bank financing. Domestic banks, notes PIDC’s chief financial officer, Myra Reinoso, are much more familiar with the credit of the construction companies that make up the consortium, and the project does not have to work around foreign exchange risk.

The time taken between 2009 and 2011 in closing the financing had one principal benefit. The original modeling for the project anticipated that the project’s all-in rate was likely to be as much as 12% (and so close to the rate on the dollar high-yield refinancing on Manila-Cavite). By the time the deal closed, this rate was reduced to 8%. The financing has amortization based on actual cashflows, but is likely to have a bullet repayment at maturity, so a refinancing on or before that date is probable.

Construction started even before financial close took place, funded by Ps2.5 billion in sponsor equity. San Miguel, through holding company Rapid Thoroughfares, has emerged as the principal shareholder, though as part of an increase in the project’s capital from Ps4.6 billion to Ps6 billion.

The progress of PPP in the Philippines has been halting of late, but the success of TPLEX suggests that the country can nurture a domestic financing market for infrastructure.

Private Infrastructure Development Corporation
STATUS: Signed 2 June 2011, first draw September 2011
SIZE: Ps19 billion
DESCRIPTION: 35-year concession for 84km greenfield toll road running between La Paz, Tarlac province, and Rosario, La Union province.
GRANTORS: Department of Public Works and Highways and Toll Regulatory Board
SPONSORS: DM Consunji, First Balfour, DM Wenceslao, CM Pancho Construction, RD Policarpio, JV Angeles Construction, JE Manalo, New Kanlaon Construction, EEI Corporation, and Rockford Development Corporation, and San Miguel/Rapid Thoroughfares
DEBT: Ps11.5 billion
LEAD ARRANGERS: BDO Unibank, Development Bank of the Philippines, and Land Bank of the Philippines
LEGAL ADVISER TO PROJECT COMPANY: Tantoco Villanueva De Guzman & Llamas
LEGAL ADVISER TO LENDERS: Martinez Vergara Gonzalez & Serrano
FINANCIAL ADVISER TO PROJECT: BDO Capital
INSURANCE BROKER: Anchor Insurance Brokerage and Dacon Insurance Brokers
INDEPENDENT CONSULTANT: North Luzon Roadlink
LENDERS’ TRAFFIC ADVISER: Halcrow