Cintra and SNC-Lavalin each own 50% of 407 East Development Group, the project company for the 30-year availability- based design-build-finance-maintain concession of the eastern extension to the 407 toll road. Cintra also owns 43.23% of 407 ETR Concession Company, which holds the 99-year real toll concession for the original sections of the 407 toll road, while SNC owns another 16.77% and the Canadian Pension Plan Investment Board owns the remainder.

The lease of the original sections of the road, which closed in 1999, attracted considerable negative comment in the province, both because critics felt that the sale brought in too little in proceeds, and because the terms of the concession gave the owners a high degree of freedom to set tolls. Shortly after the present administration took office in 2003 it sued, unsuccessfully, to try and roll back toll increases, a part of its election platform.

The province took a similarly sceptical approach towards the earliest versions of PPP, publicly opposing the practice, and then re-launching PPP with new branding and subtly altered risk transfer (DBFM). But the design-build-finance-maintain template that has evolved over the last eight years has proved durable and popular. When, in 2009, Ontario proposed extending the road, it was willing to use a DBFM concession, but insisted on retaining control of of both toll rates and revenues.

Ontario issued a request for qualifications in June 2010. The Cintra-SNC grouping, which was formally named preferred bidder in April 2012, beat an OHL/GlobalVia/Borealis/ Con-Drain/Coco Paving consortium and a grouping of Bilfinger Berger/ Macquarie/ AECON/Fengate/Dufferin/ Miller/Kiewit. The two winning bidders had a chequered history with the province, but knew the road and its traffic intimately.

Their past history aside, the concession presented both sponsors with challenges. Cintra’s preference is for real toll concessions with traffic risk. It recently sold its assets in Chile, a market where it developed its toll road development expertise, after a restructuring of the concessions had limited its ability to profit from improvements in their performance. SNC, meanwhile, endured a dreadful year, battling corruption allegations connected to its business overseas, culminating in a raid by the Royal Canadian Mounted Police on its Montreal headquarters.

The long-term private finance component of the extension is small. The sponsors are providing $31.8 million in equity, and the financing includes a C$120.4 million 33-year bond issue. The remainder of the financing includes a C$451 million three-year bond issue and $300 million in bank debt, all of which will be repaid with milestone and substantial completion payments, and C$234.3 million in VAT repayments, cash holdbacks, interest proceeds and an allowance for building tolling infrastructure.

The financing is unusual for incorporating long bond, short bond, and short bank debt, though BMO and Desjardins led both the bond and the bank pieces, which made dealing with intercreditor issues easier than when European banks dominated bank pieces. The 407E bank tranche participants were all Canadian, illustrating how difficult European lenders now find it to participate in any part of the Canadian PPP market. According to Alejandro Vermendi, the project finance manager for North America at Cintra, the optimal financing structure for the project included all three types of debt.

The long bonds priced at 203bp over the equivalent government of Canada bond for a 4.473% coupon, while the short bonds priced at 138.4bp over the equivalent benchmark for a 2.813% coupon. The spread on the long bonds was 16bp outside the long bonds for Alberta’s Anthony Henday NE, which priced almost two weeks before 407E. Given that Alberta, the counterparty on the Henday concession, is triple-A-rated and Ontario, the counterparty on 407E is AA-/Aa2/AA (low) (S&P/Moody ’s/DBRS), the disparity is understandable. Ontario, unlike Alberta, provides a guarantee of spreads, meaning that sponsors have few incentives to take risks by tweaking financing structures.

Still, despite historic lows on PPP bond spreads, the province kept the private finance component of the deal to a minimum, concentrating on transferring construction, life-cycle maintenance, and operations and maintenance risk to the private sector. Cintra might have preferred to take on more of the risks associated with tolling the asset, but a limited degree of risk transfer is in line with the province’s priorities since 2004.

The project involves building and operating a 20km extension of 407 from its Brock Road in Pickering to␣Harmony Road North in Oshawa, as well as the West Durham Link, which will runs between 407 and␣Highway 401. The construction cost of the work is $796.4 million, and the design- build contractor for the road is a joint venture of SNC and the Canadian subsidiary of Cintra’s parent, Ferrovial. The project benefits from C$33.8 million in contingent equity support from the sponsors, parental guarantees for 40% of the contract price, and a 10% letter of credit. According to more than one person familiar with its strategy, Cintra's preference is still to pursue traffic risk deals, but it will look more closely at availability-based deals in the future.

407E Development Group
STATUS: Signed 15 May, closed 18 May 2012
SIZE: C$1.24 billion
DESCRIPTION: DBFO road in Ontario, Toronto
GRANTOR: Province of Ontario
EQUITY: C$31.6 million
SPONSORS: Cintra and SNC-Lavalin
DEBT: C$120.4 million 33-year bonds, C$451 million in three-year bonds, C$300 million in bank debt
BOOKRUNNERS AND ARRANGERS: BMO and Desjardins
LENDER LEGAL COUNSEL Osler
SPONSOR LEGAL COUNSEL: Davies Ward
INSURANCE ADVISER: Intech
TECHNICAL ADVISER: Leigh Fischer
MODEL AUDITOR: Mazars