Invepar’s $983 million Via Parque Rimac toll road project in Lima is not the first PPP in Peru to make use of the country’s liquid capital markets. But it is the largest project bond in the country’s history. Commercial debt makes up only a small portion of the financing, the deal is denominated entirely in local currency, and the sponsors financed the project without any contributions from local or central government.

Via Parque Rimac comprises a 25.5km urban road network. The project includes the construction of 2km tunnel under the Rimac river, 10 viaducts or bridges, and corresponding connecting roads. It also involves the upgrading of 10km of the urban toll road Via de Evitamiento, the operation and maintenance of the new sections, and the operation, maintenance and improvement of the existing ones.

Brazilian construction company OAS made a bid for the project in 2009 and won a 30-year concession from the Municipality of Lima. OAS sold the concession down to Invepar, of which it owns 25%, in March 2012, and four months later the sponsor achieved financial close. Brazilian funds BB Fundo de Investmento em Acoes, PETROS and FUNCEF each own a 25% stake in Invepar.

The sponsor was able to make investors comfortable with construction and traffic because of the high existing burden on Lima’s existing road network. Peru has enjoyed consistently strong economic growth over the last decade and car ownership has doubled during this time, but the city’s roads have experienced virtually no upgrades. Via Parque Rimac involves an expansion of an already successful toll road, and during the construction phase 80% of cashflows will come from existing tolls.

Special purpose vehicle Linea Amarilla Brasil is the project company for the development. Over 40% of the total project costs are being covered with sponsor equity or existing toll revenues. The sponsor is providing S./600 million ($234 million) in cash equity, while S./526 million will come from tolls. Citibank is common security agent and indenture trustee for the project, and will oversee the intercreditor issues between bank and bond lenders.

Banco Credito del Peru and Banco Internacional del Peru have jointly provided the S./217.4 million 10-year bank loan, which has a fixed rate of 9.45%. The remainder of the debt came in the form of two bond tranches, both with 25-year maturities. One S./371 million tranche has a fixed rate of 8.58%, while the larger S./807 million tranche is inflation adjusted and starts at 9.45%. BNP Paribas was sole bookrunner on both issues and financial adviser to the sponsor after winning both mandates in 2010.

The sponsors would have been able to have 50% of the project’s revenues to be indexed in dollars, as long as 50% of the debt was also denominated in dollars. The support of local lenders and the appetite for the deal in the bond market, however, allowed the sponsors to keep the debt entirely in local currency.

“The situation where truck drivers discover one morning that their toll rates are much higher because of a changing dollar rate, is one that could be socially and politically difficult,” explained Jean-Valery Patin, head of Latin American project finance at BNP. “So as much as you can, you try and avoid this by funding in local currency.

“We did contact international banks but the discussions did not go as far as credit approval. At a certain point we realised we could do without non-local lenders. These foreign institutions would have lent in dollars, and they were less familiar with the traffic situation in Lima.”

Fitch has rated the project AAA local, which is equivalent to BBB- in global ratings. In Peru, investment grade for pension funds and institutional investors is AA local. To mitigate against negative carry the bank tranche has only disbursed a token amount of funds to meet conditions precedent, with the remainder of the debt likely to fund at a later date.

The Peruvian pension fund system was created in the 1990s and benefits from a healthy imbalance between contributors and dependants. Project bonds have become increasingly attractive to these AFP funds, as other investment opportunities grow scarcer relative to demand. The first of these bonds appeared on the market in 2005, but Via Parque Rimac is the first on which government has provided no direct or indirect credit support.

Several other road developments are underway in Lima at present, but the concession agreement contains a clause preventing the construction of a competitive route near to the development. The project involves the relocation of 2,000 homes. A conservative estimate has been made on the costs of relocation, which the developer has to cover. Any costs in excess of this total will be met by the government, who has an obligation to ensure rights of way for the project.

The Peruvian capital markets have always been happy to accept greenfield project bonds with watertight government payment obligations, and there is recent evidence that they will accept some revenue risk – for the right price. The brownfield Linea Amarilla issue suggests an improvement in the ability of governments to shift operating risk to sponsors – for the right asset. 

Linea Amarilla
STATUS
Financial close June 2012
SIZE
S./2.6 billion ($983 million)
DESCRIPTION
The construction of a 25.5km highway which includes a 2km tunnel under the Rimac River and road improvements in Lima, Peru.
SPONSOR
Invepar
DEBT
S./1.4 billion
LENDERS
Banco Credito del Peru, Banco Internacional del Peru
BOOKRUNNER AND STRUCTURING BANK
BNP Paribas
FINANCIAL ADVISER TO SPONSOR
BNP Paribas
SECURITY AGENT AND INDENTURE TRUSTEE
Citibank
LEGAL ADVISERS TO SPONSOR
Davis Polk & Wardell (international) Estudio Echecopar (local)
LEGAL ADVISERS TO LENDERS
Mayer Brown (international) Estudio Rubio Leguia Normand (local)
TECHNICAL CONSULTANT
Arup
TRAFFIC CONSULTANT
Mott MacDonald