Castellon's Airport scheme breaks new boundaries in the Spanish market, being the first greenfield airport deal to be procured as a PPP

With the Spanish PPP market as vibrant as ever, it was only a matter of time before the procurement method - which has been tried and tested in the country's booming shadow toll road sector - was used on a small-scale airport deal and with the influx of low cost flights to Spain, another two are coming on stream too. 

The country's health PFI programme is also slowly moving off the ground and 2006 has already seen the closure of the first two deals of six. 

In March ACS, Sacyr Vallehermoso and Bovis Lend Lease successfully closed Spain's first PFI hospital project - the €250 million (US$300m) Puerta del Hierro hospital in Madrid and financing for the city's second scheme at La Parla was concluded more recently.

However, it is the country's road programme which has paved the way for a bright PPP future and the closure earlier this year of the US$4.9bn Madrid Calle 30 - is proof that Spain is capable of procuring even the most complex of projects.

While the €112m Castellon transaction cannot compete with Madrid's highly leveraged deal in terms of scale, the autonomous region of Valencia can be proud that it has nurtured one of the first new build airport PPPs in Europe and one which wet the appetite of plenty of domestic and foreign banks.

Rationale

When considering that the three provinces of Valencia - Valencia, Alicante and Castellon - are already served by two international airports at Valencia and Alicante and a domestic facility at Reus, you're left wondering just how much need is there for a new airport in the smallest area of the region.

However according to a source close to the deal: 'The area is experiencing huge economic growth thanks to the development of real estate, golf courses and tourism.'

Due to its proximity to the Costa Azahar, the main focus of passenger traffic will be tourists. The province of Castellon is committed to developing a number of new golf courses, hotels and apartments to encourage more domestic and foreign visitors to the under-developed coast.

Equally the potential for tourism in the Castellon province is relatively under-exploited so the airport will have an important role to support the growth of these leisure resorts as well as the coastal developments.

The new facility is expected to attract a number of low cost carriers and air cargo firms, as the landing, parking and handling charges - which will be set by TBI, the new operator - are expected to be lower than the regulated tariffs at airports nationwide which are run by state operator AENA. 

Cargo operators an airfreight services will also benefit from Castellon's round the clock operations and the lack of runway slot restrictions among others.

The Project

The proposal to build an international airport in Castellon was first mooted by the provincial government in 1996. It was soon decided that the airport would be erected on a greenfield sight after studies showed that an airfield located near Castellon de la Plana used for business and general aviation activity could not be developed further.

A competitive tender process was launched by the procurement authority - Sociedad Aeropuerto de Castellón - in July 2003. Six months later the sole bidder - Concesiones Aeroportuarias - a consortium of experienced domestic players, headed up by construction giants FCC (30 per cent) and Lubasa (30 per cent), was named preferred proponent for the 50 year project.   

The remaining members of the consortium included:

• Bancaja (15 per cent )
• SPPE Caja Madrid (15 per cent)
• PGP Asociados (5 per cent)
• Abertis Aeroports (5 per cent)

Global airport operator and owner TBI - whose portfolio includes London Luton, Belfast and Cardiff Airports - will operate the facility. The EPC contractors were FCC and domestic firm Lubasa.

The project itself will entail the construction of a 9,000 metre squared terminal building, a 2,700 metre runway and an area for cargo and catering. The construction phase - which has already got underway - will take 36 months and is expected  to be complete by mid 2008.

However the construction phase has been subject to lengthy delays, due to planning permission difficulties and the state government - Generalitat de Valencia - halted work on site until February when Spain's Civil Aviation Authority gave the green light to continue. 

The facility is expected to come on line by 2009 and is initially expected to handle 600,000 passengers per year. By 2016, the facility is expected to reach one million - a challenging target according to FCC project director Jose Maria Garcia.

'Over the last decade, Spain's aviation market has seen huge changes. There has been an influx of passengers thanks to low cost carriers and we expect to have 10,000 operations per year in 2016.'

The new airport is expected to develop its own demand base, rather than operate as an overflow or reliever for the other main airports.

The new airport will be connected to the A-7 motorway - a road that is operated by Abertis that connects the most important tourism centres in the north of Castellon province.

Transaction

Spain's leading project finance bank, Banco Santander acted as mandated lead arranger and underwriter of the scheme's €34.2m senior debt, a facility which was closed on 29 March 2006 having been syndicated to eight domestic and European banks.

The participant banks included:

• Espirito Santo Investment
• Dexia Sabadell Banco Local
• Lloyds TSB Bank
• Caixa-Banco de Investimento
• Banco de Sabadell
• Caixa d'estalvis de Catalunya
• Caja de Ahorros provincial San Fernando de Sevilla y Jerez
• Natexis Banques Populaires

The €34.2m senior debt facility is priced between 100-120bps above Euribor and comes with a tenor of 18 years. The six sponsors are providing €33.55m of equity giving the deal a very low geared debt/equity ration of 57:43.

Generalitat Valenciana - the regional government - is providing a participating loan of €44.2m.

The low leveraged nature of the transaction and the early maturity of the senior debt reflects the project's vulnerable status as the first airport PPP scheme in what is a relatively untested market. 

According to Santander's Jose Benjumea, the lack of passenger guarantees was one of the main risks facing the lenders putting together the financing package.

However the combination of a solid financing structure and a group of very experienced project finance sponsors would put the airport in good stead to compete against other airports - especially Reus, he said. 

Through a shared mechanism, the banks and provincial government of Castellon are taking the traffic risk - Castellon will be responsible during the first 8 years of the scheme. 

During the first ten years of the scheme, the DRCR is 1.4x before being ramped up to 1.7x for the remainder of the tenor. The senior debt will be repaid on a weekly schedule.

According to Garrigues partner Jose Guardo, the deal threw up its fair share of legal difficulties associated with a first deal of its kind.

Differences between provincial and municipal governments and the wide range of shareholders within the consortium added to the difficulty of customizing the project's legal structure. 

Added to that, the largest hurdle the lawyers faced was putting in place a non financial agreement, or warranty that shifted  the traffic risk to the provincial government for the initial phase of the scheme.

Garrigues acted on behalf of the sponsors and government while Shearholders was hired by the consortium to provide financial advise. BSCH was the government's financial adviser.

Broseta Abogados acted as the sponsor's legal adviser whole Mott Macdonald and SH&E were technical consultants.

Conclusion

As the frontrunner of Spain's nascent airport PPP market and one of the first in Europe, all eyes will be on the Castellon airport project to see whether the cautious but robust financing structure will see out the inevitable turbulence during the early years of operation.

The very low geared debt/equity ratio was put in place inorder to counter balance the huge traffic risk associated with an airport deal of this kind. 

The project is the first of three pilot schemes to be rolled out in Spain and it will be interesting to see how similar projects at Ciudad Real and Murcia - currently being tendered -  are packaged together and whether they attract equal amounts of interest from the banking communities. 

The regional government, lenders and sponsors will be holding their breath to see whether the developing resorts in Castellon and the surrounding area entice an influx of tourists to what is otherwise a relatively untouched corner of Spain.  Without them, the project is sure to nose dive fast.

The project at a glance