Spanish Municipal water utility EMASESA (Empresa Municipal de Abastecimiento y Saneamiento de Aguas de Sevilla) closed financing for its water supply and treatment investment program in November 2002.  The deal presented a unique feature: EMASESA would sell future rights to charge end-users with an improvement fee enabling it to raise capital without affecting its debt ratio.

Dexia Sabadell Banco Local, the Spanish subsidiary of Dexia Credit Local, was lead arranger for this innovative financing agreement. The transaction was co-lead arranged with Ahorro Corporation Financiera, and also involved the EIB and the monoline insurance company FSA.

Legal FrameworkThe regional government of Andalucia introduced a decree in 1994 allowing EMASESA to charge its customers a specific fee called the ‘canon de mejora’ based on their water consumption. In July 2001 Andalucia issued a further decree expending the Canon’s applicability from 2006 to 2016 and increasing the fee. When Dexia approached EMASESA, in 2001, with the idea that it could raise equity by selling forward the rights to these charges, the scheme had already established a solid 8 year credit history.

The Andalucian regional government’s decree includes a provision to revise the Canon rates should economic factors, such as interest rates or water consumption, result in a shortfall under the bank repayment schedule but this is an unlikely scenario. A comforting factor for lenders is the contractual provisions which allow for the resale of the rights to EMASESA, should any changes in the legal environment alter the terms of the Canon.

The projectEMASESA manages the water supply and sewage services for the city of Seville, the fourth largest city in Spain and neighboring 13 municipalities. Under the terms of the Canon, fees collected can only be used to pay for infrastructure investments to improve the water service. Required improvements included the upgrading of mains, pumping stations, and treatment plants. The upgrades are to be carried out until 2004 and are designed to improve the quality of the water supply.

A loan collateralised by the future canon proceeds would have impacted EMASESA’s balance sheet leaving little room for any other investments the municipality was planning to make. EMASESA Financial director, José Manuel de la Puente Méndez, explains that the financing arrangement marked a new way to finance infrastructure investment: “We believe that our experience after this financial operation could be extremely useful for other companies looking for innovative financial solutions.”

FinancingBy selling the rights to charge improvement fees, the deal is non-recourse and consequently has no balance sheet impact on the level of indebtedness of the municipality.

“It’s not a loan transaction for EMASESA and the municipality. It is a rights purchase deal where EMASESA sells the future rights they have, and the banks are buying these upfront,” explains Rene Kassis. The deal is mutually beneficial for all concerned parties: “EMASESA gets the money upfront to finance the investment programme and the banks get repaid through the proceeds of the canon, and there is no further indebtedness for EMASESA.”

EMASESA Financial director José Manuel de la Puente Méndez highlights the four main advantages of the scheme: - “Its is an off balance-sheet operation; - it is not part of the City Hall debt; - there is reimbursement flexibility, based in fees collected; - and it is less expensive than other financial solutions under the constraints put on Spanish municipalities.”

The system also has no impact on customers’ rights and obligations.

EMASESA needed to raise Euro 96.15 million for the project. The EIB funded Euro 60 million with a 14.25 year maturity and an AAA rating from Dexia’s affiliate FSA. The EIB tranche was granted a senior rating in terms of rights to the Canon proceeds.

The commercial tranche of the deal, funded principally by Dexia, provided a further Euro 18.08 million. This tranche benefits from an earlier amortisation schedule allowing full repayment in 8 years, before the EIB trance starts to amortise.

The remainder of the balance was fulfilled by three savings banks, El Monte, Unicaja and Caja San Fernando which each hold Euro 6.03 million each for a tenor of 8 years. Pricing of the debt has not been revealed but it is thought to be at a competitive rate below 100 base points. There are no plans for re-financing as the terms are too short to justify it.

Inspiring municipal financeSpanish regions are becoming increasingly sophisticated in their use of capital markets and several have issued wrapped bonds before to fund local entities. However, the EMASESA deal was the first example of using a purchase of rights on improvement fees to finance a water infrastructure investment on a non-recourse basis.

“The deal has set a precedent and we are hoping it can be done in other cities,” Kassis insists, adding that a legal environment similar to the Canon de mejora will need to be in place in order for this to happen.IJ