Northern Capital Highway, a consortium comprising VTB Capital and Gazprombank, has closed the Rb60 billion ($3.6 billion) project financing for the Western High Speed Diameter toll road concession. The financing is one of the largest financings for a toll road concession anywhere in the world, and demonstrates the high level of domestic lender appetite for local currency project debt in Russia.

The borrower will use the proceeds of the debt to fund the construction of the central section of the road. The central section is about 11.7km long and involves the most construction risk, since it involves building three bridges and a tunnel. The project company will also be responsible for the operations and maintenance of the northern and southern sections, which the city of St. Petersburg is procuring directly.

Once built, the road will connect the city’s major commercial port with the St. Petersburg ring road in the south and with the motorway to Finland in the north. It is designed to alleviate traffic congestion and divert up to 140,000 vehicles a day from the city’s centre. The city authorities decided to separate the project into separate chunks given the fate of an earlier version of the concession, which included all three sections but fell victim to the financial crisis.

The city of St. Petersburg is funding construction of the northern and southern sections through government contributions and the proceeds of federal government- guaranteed bond issues. Western High-Speed Diameter, a sole venture owned entirely by the city of St. Petersburg, has raised around Rb25 billion in senior unsecured bond issuances at a variety of coupons to finance construction.

The grantor tendered the central section at the beginning of 2011 and pulled in three bids: one from the VTB Capital and Gazprombank consortium, one from a consortium comprised chiefly of First Quantum and Sberbank, and a Samsung- led consortium. The Samsung-led group withdrew shortly before the bids went in and the two other consortiums submitted offers at the beginning of July 2011.

The city awarded the project to the VTB and Gazprombank consortium the following month. The winning bid from Northern Capital Highway proposed a Rb9.67 billion per year minimum revenue guarantee over the concession’s 30-year term and offered to share 90% of the upside with the city. The losing bidder offered to share 100% of excess revenue, but wanted a Rb16.15 billion per year guarantee.

The winning consortium submitted letters of support from VTB and Gazprombank at the bidding stage, and had to bring in additional lenders after the concession was awarded. The sponsors settled on a group of lenders by the end of 2011 and drafted an initial term sheet in December, which formed the basis for the financing that signed.

Five lenders – Gazprombank, VTB, the State Corporation Bank for Development and Foreign Affairs (Vnesheconombank, or VEB), the European Bank for Reconstruction and Development (EBRD) and the Eurasian Development Bank (EDB) – signed a single facility agreement to provide around Rb60 billion in long-term project debt, which has a tenor of 12 years.

VEB is lending Rb25 billion, the EDB is lending Rb10 billion, and VTB and Gazprombank are lending Rb9.5 billion each, in project debt. VTB and Gazprombank are also providing a Rb5 billion working capital facility, split equally between the two, which has a tenor of 3 years. The debt package is then rounded off with Eu200 million ($250 million) from the EBRD.

The debt service reserve account is also denominated in euros so the sponsors will use the interest income on this account to make repayments to the EBRD. The reserve is also sized to cover the difference between the city’s ruble payment which is set at 88% of the senior debt, and outstanding principal on the debt in the event of a termination.

For the rest of the financing, VTB is hedging the foreign exchange risk for six months, since the initial payments to Ictas Astaldi, the engineering procurement and construction contractor, are in euros. The federal government is providing roughly Rb51 billion in grants while the sponsors are contributing Rb10 billion in equity. The deal still needs to meet a small number of conditions precedent, but is expected to fund in a few months.

The size of the debt package demonstrates there is abundant local liquidity for large-scale project financings in Russia with ruble-denominated revenue stream. The sponsors had considered a mixed currency financing in the beginning, but eventually decided that the advantages in terms of tenor and pricing would be diminished because of the long-term hedging requirements.

The sponsors recently received a letter of interest from SACE about covering a portion of the debt from Gazprombank and VTB Capital The guarantee is available in euros, so should the banks decide to go down this route, it would help the deal to attract international lenders during a broader syndication. But, the lenders might decide that broadening the funding base is not worthwhile because of the currency risk.

Northern Capital Highway
STATUS: Signed 22 June 2012
SIZE: Rb120 billion
DESCRIPTION: Financing for the construction of the central section of the Western High Speed Diameter toll road in St. Petersburg. Construction is expected to be completed in 3 years.
GRANTOR: City of St. Petersburg
SPONSORS: Gazprombank, VTB Capital
LENDERS: Gazprombank, VTB Capital, VEB, EBRD, EDB
GRANTOR’S FINANCIAL ADVISER: Ernst & Young
GRANTOR’S LEGAL ADVISER: Herbert Smith
GRANTOR’S INSURANCE ADVISER: Marsh
SPONSORS’ FINANCIAL ADVISER: Gazprombank, VTB Capital
SPONSORS’ LEGAL ADVISER: Freshfields Bruckhaus Deringer
SPONSORS’ TECHNICAL ADVISER; Aecom
SPONSORS’ TRAFFIC ADVISER: Scott Wilson
SPONSORS’ TAX ADVISER: PricewaterhouseCoopers
SPONSORS’ INSURANCE ADVISER: Aon
LENDERS’ LEGAL ADVISER: Linklaters
EPC CONTRACTOR: Ictas Astaldi