• Largest PPP bond to close in Europe this year
• Followed the resolution of disputes with government
• Unwrapped financing priced below recent trades

The R1 Expressway refinancing was the first PPP in Slovakia when it reached financial close in August 2009. The 51.6km dual-lane road links Slovakia’s two largest cities – Bratislava in the west and Kosice in the east – and provides vital access to the country’s borders. The R1’s bond refinancing was over-subscribed, with half the bonds placed to European institutional investors. It is the largest unwrapped, non credit-enhanced issue for a PPP in Europe.

Granvia AS

STATUS

Priced 22 November 2013

SIZE

Eu1.24 billion

DESCRIPTION

Bond refinancing of 51.6km dual-lane operational highway with availability based revenues.

SPONSORS

Meridiam Infrastructure 50%, Vinci Concessions 50%

GRANTOR

Ministry of Transports, Posts and Telecommunications

DEBT

Eu1.24 billion

MATURITY

2039

COUPON

4.78%

BOOKRUNNERS

Deutsche, Natixis

ISSUER’S FINANCIAL ADVISER

Deutsche

GRANTOR’S FINANCIAL ADVISER

HSBC

SPONSORS’ LEGAL ADVISER

Linklaters

BOOKRUNNERS’ LEGAL ADVISER

Allen & Overy

GRANTOR’S LEGAL ADVISER

Ashurst

TECHNICAL ADVISER

Atkins

On 22 November 2013 Granvia priced Eu1.24 billion of bonds, which listed on the Luxembourg Euro MTF market. They priced at 235bp over mid-swaps for a 4.781% coupon that is paid semi-annually. The bonds mature in 25 years and 8 months, and fully amortise two years before the concession ends. The bonds benefit from a six-month debt service reserve account. Standard & Poor’s rated the bonds BBB+. Deutsche underwrote Eu900 million of the bonds, while Natixis was also a bookrunner. The bonds priced at the bottom end of the leads’ range and attracted Eu1.4 billion of orders.

About 30 accounts participated, of which 51% were institutional investors, 24% banks, 16% multilaterals and 9% asset managers. German investors had the strongest presence (34%), followed by the UK (24%), Slovakia (11%), France (9%) and Switzerland (7%). Deutsche had been marketing the bond, which although it is listed was marketed privately, since the second quarter of 2013. KfW, an original lender on the 2009 construction financing, took a larger ticket this time of about Eu150 million, whilst the EBRD took about Eu200 million which roughly matched its 2009 ticket. Erste Bank also participated in both packages.

The November bond issuance refinances the Eu984 million in 2009 bank debt, which featured the EBRD and a large commercial bank club. The other lenders on that 25-year deal were BNP Paribas, BayernLB, BBVA, Calyon, Dexia, Erste Bank, HVB/UniCredit, ING, KfW, Natixis, NIBC, Societe Generale and UniCredit Slovakia. The soft mini-perm priced initially at 325bp over Euribor during construction, 350bp at year six, rising to 450bp by year ten, with a 50% cash sweep at year eight.

The bond issuance will refinance Eu973.1 million outstanding on that debt and pay interest rate swap breakage costs of Eu210.5 million. Deutsche provided a hedge from when the bond priced on 22 November up to the close of documentation, funding and offsetting on the swap, which took place a week later. An existing subordinated sponsor loan of Eu146.8 million and pure sponsor equity of Eu2.3 million remain in place. The leverage on the new package is 89%.

In December 2008 the Slovak Ministry of Transports, Posts and Telecommunications (MTPT) granted the 30-year post-construction design, build, finance, operate and maintain concession to Granvia, of which Meridiam Infrastructure and Vinci Concessions each own 50%. The project is divided into four sections: three form a 45.9km continuous road from Nitra to Tekovske Nemce, while the fourth is a 5.7km bypass around Banka Bystrica.

The project sponsors and MTPT had been disputing the project’s penalty regime for availability payments since the first section was completed in 2011. The ministry imposed penalty deductions above the concession’s termination thresholds, and disagreements covered oil separators, de-icing materials and the submission of an annual maintenance plan.

The construction contractors were obliged to pay liquidated damages, but the project continued to meet debt service and the disputes did not escalate into litigation. The road became fully operational in September 2012 and following a memorandum of understanding between sponsor and authority, the government started making availability payments on 1 November 2013.

The memorandum confirms a base availability payment of Eu125.4 million per year from the grantor, 10% of which is indexed. The maximum penalty or bonus in any year is Eu2 million for safety-related issues, and deductions up to Eu5,000 per month for each penalty point. The road must meet minimum availability of 80% to avoid termination and the concessionaire has a maximum of 300 penalty points per year. But the concessionaire can terminate its operations and maintenance contract at 225 penalty points per year and a minimum of 89% availability. Vinci Concessions is the O&M contractor.

Deutsche held road shows in London, Paris and Zurich, along with MTPT officials, which reassured potential investors about an imminent resolution to the disputes. At the time, problems with the Castor underground gas storage project were casting a shadow. Castor had priced its Eu1.4 billion in bonds at 100bp over its government benchmark on 25 July, but after seismic tremors delayed acceptance on the facility its bonds were trading at closer to 250bp.

The MTPT had set a minimum debt service saving requirement for the bond issuance to go ahead, and the sponsors retained the option of closing a short-term bank financing or maintaining the original debt. The average debt service coverage ratio was 1.35x under the original debt package, with S&P assessing it at a base case 1.27x after the refinancing.

The asset has few comparables and interest and pricing expectations varied hugely. More marginal and local investors were prepared to go close to the sovereign, but many European investors with a strong understanding of PPP were hoping for wider pricing.

The sponsors’ track record helped attract commitments. Both are serious PPP players and Meridiam was a sponsor of the L2 Marseille PPP, which issued Eu164.5 million of bonds in October 2013. The L2 bonds were also unwrapped, although in that case they financed a greenfield project and were placed to a single buyer – Allianz.

Investor appetite for long term PPP debt exposure has been strong this year, with pension funds and insurance companies accounting for much of the demand. Slovakia’s experience in resolving issues between concessionaire and government will help it procure other strategic road projects in early development.