When the Greek government tendered its €8 billion highways programme in 2001 a panoply of European construction firms vied against each other to secure a foothold in the promising new market - write Simon Ellis and Vander Caceres.

The public backing of the European Union - which had already pumped more than €7 billion into modernising Greece's transport infrastructure - seemed to sweeten the opportunity by assuaging risks associated with the new market.

Yet two legal challenges, one European Commission investigation and an Olympic-sized distraction later - the first of the projects, a €521 million underwater tunnel in the northern city of Thessaloniki, has finally limped to close - or just about.

The ink is now dry on the legal and financial contracts for the sub-sea harbour tunnel concession  - however the deal has still to be ratified by the Greek Parliament and European State Aid panel.

The uneven progress of the tunnel project has typified a deal stream benighted by a lack of communication between the Greek government, the EU and bidders.

In fact tensions between the Greek government and EU have often proved the Greek transport programme's Achilles heal. The city's sister transport project - the €1.1bn Thessaloniki metro - was abandoned as a PPP when the EU ruled it breached State Aid rules.

However the Thessaloniki tunnel looks likely to survive the same fate and set a precedent for an appropriate level of risk transfer for the Greek market.

The project

The ambitious Thessaloniki project consists of the construction of a six-lane toll tunnel to pass under Thessaloniki harbour basin.

The tunnel would consist of a 1.5km underwater section and 2.5km of surrounding cut-and-cover sections linking the east-and-west ends of the city's harbour and diverting traffic from the city centre.

After an abortive first tender the concession was offered again in 2003 and drew competition from seven consortia:

• Thermaiki Odos - a consortium of Helleniki Technodomiki, Boscalis, Archirodon and Aktor
• Poseidon - a consortium of Hochtief, Dragdos and Athena
• Transport Thessaloniki - a consortium of Strabag, Bilfinger Berger and Aegek
• Vinci , J&P, Etairia and Cofiroute
• Bouygues, ASF, Alte and Volker Stevin
• Thescos -  FCC, Satantopoulos, E Pihl & Son, Macquarie and Pireos Finance
• Filippos Group, Imregilo, GEK, Empedos and NCC

In late 2004 the all-Greek sponsored Thermaiki Odos consortium was selected as preferred bidder.

The decision was challenged by the Vinci and Hochtief led teams delaying the project. Eventually the claims were thrown out by the Greek and then European court.

The final consortium consists of:

• Hellenic Technodomiki (50%)
• Boscalis (17.5%)
• Archirodon (32.5%) consortium.

Subject to ratification by the Greek government, Themaiki Odos will begin boring the tunnel March 2007 and complete works in Q1 2011. The consortium will then operate the tunnel on a 30-year contract.

The Financing:  The power of relationship

Back in 2004 when Thermaiki Odos was bidding for the contract it did so with the financial backing of local bank EFG Telesis Finance and Bank of Ireland. Negotiations over the structure and price of the project finance package were actually finalised.

The €451 million debt package was split as follows:

• A €96 million bridge facility with a tenor of four years and priced at Euribor plus 120bp
• A €15 million working capital facility with a tenor of 25 years
• Two €10 million standby facilities with tenors of 25 years
• A €152 million term loan with a 25-year maturity
• A €168 million guarantee facility from the EIB

Pricing on the €152 million and €168 million senior tranches was set on a step-up basis according to the following grid:

A performance pricing grid was also arranged whereby if the debt service coverage ratio is higher than 1.25 then there is a discount of 10bp, whereas if the loan life coverage ratio is higher than 1.45 then there is a premium of 10bp.

By June this year Bank of Ireland had lost patience with the speed of progress and withdrawn from the project. Instead, Millennium BCP and HVB were invited to participate.

Sergio Santos, an investment officer at Millennium BCP in Lisbon says 'the deal was relationship driven and the structure and pricing of the debt package remained unchanged'.

The three MLAs underwritten all the tranches on equal apportionments except for the €15 million working capital facility, which was solely underwritten by EFG Telesis Finance.

Signing of the loan agreement took place on 31 October, the same day that the concession agreement was signed between the authorities and Thermaiki Odos. Syndication will be launched soon after the Greek Parliament ratifies the concession agreement within the next four months.

Although there is no strategy as to how syndication will be conducted, it is expected to be offered to relationship banks. Millennium BCP's Santos says that part of the debt will be kept in their books. 'Greece is a domestic market for us and we are committed to support projects in the country' he adds.

Millennium BCP is backing bids for two more road projects in Greece although financial close is not expected until 2008.

But the commercial banks are not the only ones bullish on the infrastructure market in Greece. EIB whose core expertise is the financing of transport infrastructure is likely to start taking on more project risk in contrast to the status quo.

A London-based banker says 'EIB will take project risk on their own right. You will see that happening in Greece as well over time.'

An additional benefit of having the EIB on board is that it helps deals to avoid taxes and therefore sponsors are keen on an EIB tranche.

Further funds for the project come from a €100 million government grant that carries a 5 per cent final retention payment. Funds will be released in tranches after certain milestones are achieved.

The equity portion on the deal is €70 million, which gives us a debt:equity ratio of 85:15. However, if the grant is included as equity, the final capital structure is not as highly levered as this ratio suggests.

That is why the €96 million bridge loan is in placed as a counterpart to grant payments from the government and is exposed to construction risk.

Conclusion - Three is a crowd?

Financing for the project was not very different from other deals, except of course for the margins. At 140bp the deal is bringing handsome rewards to lenders in comparison to today's competitive pricing levels.

The Thessaloniki can not be used as a benchmark for the pricing of the five road projects on the Greek market: the Athens Urban project; Alefesina-Corinth-Tripoli-Patra-Tsakona road; Corinth-Tripoli-Kalamata/Sparti road; and Ionian Odos, Athens-Maliakos and Schimatari-Chalkida road.

However the deal can be seen as a model in terms of the three-way financing split between the EIB, the Greek government and commercial banks. 

While in the past the EU and Greek government have been at loggerheads over State Aid, they have now found a way of complimenting each other's financing and ultimately lifting much of the burden of risk from the private sector. 

The project at a glance