Belgium's Liefkenshoek rail tunnel project has reached financial close - no mean feat in the current market. In more fluid financial times, the FC of a deal like this would not have caused such a stir - but the fact that it closed in November 2008 makes it something quite special.

In many ways this was a classic DBFOM agreement, or even one of the simpler ones. Infrabel, the state-owned rail infrastructure provider which procured the tunnel, decided to keep the rail infrastructure out of the contract - and have the sponsor be responsible for just the tunnel construction itself, along with the provision of ventilation and fire safety features.

Not only that, but - in contrast to Infrabel's last PPP,Diabolo - Liefkenshoek will be paid for on an availability basis, independent of traffic through the tunnel.

But if this deal was, on the face of it, an unexceptional one - it was being cut in truly exceptional times. The current unpredictability of liquidity has made project finance lending anything but 'business as usual' - so this deal had to include a little of the unusual to get it away.

That came in the shape of an unprecedented move by the state procurer to take market disruption risk on itself for the duration of the construction period - in this case, more than four years.

Taking risk back onto the shoulders of the state might, to some, destroy the PPP model's raison d'être, but talking to various members of the project finance community over the past few weeks, it is being seen as one of the few ways of making project finance work in the current credit crunch.

The project

The Liefkenshoek Rail Tunnel project involves the construction and maintenance of the civil infrastructure for a new 16.2km freight-only railway linking the western docks and eastern docks of Antwerp.

The contract is worth a total of €841 million and has a 42-year concession, including 4 years construction.

The project involves the construction and maintenance of civil infrastructure (with associated electro-mechanical systems where essential for maintenance of the civil infrastructure) to provide for others to construct, maintain and operate the railway.

The 16.2km route breaks down as follows:

• 4.76km of railway zone through excavation
• 4.27km of infrastructure in open and covered trenches
• 1.2km of existing tunnel (re-opening of the already constructed but never used Beveren tunnel)
• a double bored tunnel of 5.97km (inner diameter of 7.30m)

Infrabel is keen to keep the railway infrastructure to itself - employing contractors through traditional procurement means.

On its first PPP project - Diabolo - Infrabel included the railway in the contract, but on condition that it was subcontracted by the sponsor to carry out the work.

Infrabel will pay €50 million per year - through quarterly payments - to the sponsor once the tunnel is operational, on an availability basis.

A spokesperson at Infrabel said: "Container traffic is very sensitive to price. We studied the possibilities of charging to use the tunnel, but Europe's ports are so competitive we decided it wasn't viable."

When asked if that was a credit-crunch inspired decision, he said: "No. We took that decision 2 years ago - and the same deal was on the table for all bidders."

The sponsor

The sponsor which will carry out the project is Locorail, and includes:

• BAM PPP - 50 per cent
• Vinci Concessions - 25 per cent
• Belgium's CFE (47 per cent owned by Vinci) - 25 per cent

Two other consortia to have submitted BAFOs are:

• Besix and Eiffage
• Bouygues, Strabag, Macquarie, Jan de Nul and Zublin

Infrabel and Locorail went from preferred bidder stage to financial close remarkably quickly, given that BAFOs were only received in June 2008.

Advisory roles

For the sponsors:

• legal advisor: Freshfields Bruckhaus Deringer
• financial advisor: ING Wholesale Banking
• tax and accounting: Tiberghien and Mazars

For the lenders:

• legal advisor: Clifford Chance
• technical advisor: Mott McDonald
• insurance advisor: AON

For the procuring authority:

• financial advisor: Deloitte
• legal advisor: Allen & Overy

The financing

The project has €714 million in credit facilities. Senior debt of €616.6 million is split 50:50 between the EIB and a club of six banks:

• Bank Nederlandse Gemeenten (BMG)
• BayernLB
• Fortis
• Grupo Santander
• ING
• Societe Generale

The commercial bank club is also guaranteeing €113.3 million of the EIB's portion, meaning the EIB is lending €200 million unguaranteed.

The senior debt is on a 35-year tenor.

The commercial club is also putting up an €81.8 million equity bridge facility. The total commitment of the banks (including the EIB) is €714 million, against an expected utilisation of €708 million.

In addition to Locorail's borrowing, Infrabel is providing a grant of €107 million to the project.

The procuring authority's largesse does not stop there. Key to this deal getting away was Infrabel's willingness to shoulder the risk that the commercial banks might invoke the market disruption clause during the construction phase of the contract.

With liquidity as hard to come by as it is in the current market, the banks perceived there was a reasonable chance they would have to up their base rate from Euribor, if that was not providing an adequate representation of their costs of borrowing.

For all the strength of the sponsor consortium, it couldn't compare to a guarantee from the Belgian government. One banker involved in the deal told IJ that Infrabel's taking on of the risk "completely changed the risk profile we had in front of us".

There does still appear to be an element of a gamble on the banks' part, however - they're signed up to this deal for 35 years, albeit on relatively small tickets of on average €52 million each. But they have also written a cash-sweep clause into the contract, which kicks in after 15 years - and it's probably reasonable to expect that the sponsor will be looking to refinance somewhat earlier than that.

The EIB's participation is thanks to its relatively recent change of heart allowing it to take construction risk - up to 50 per cent of the funding of a project. However, it looks like on this occasion its magic number was €200 million, beyond which it needed commercial bank guarantees to get it up to 50 per cent of the project lending.

Conclusion

The credit crunch has left Europe with a number of ambitious transport deals which are now looking tricky to finance - without mentioning the names of any ring-motorway expansions or Iberian motorway networks.

Liefkenshoek tunnel - coming in at close to €1 billion all told - was never going to be a Mickey Mouse deal, but late 2008's exceptional circumstances called for some creative thinking from those seeking financial close on the deal.

Thankfully the banks - it was largely their idea - came up with the ruse of handing back some of the risk, over the short term, to the government agency procuring the contract.

What is more, they handed Infrabel exactly that risk which the credit crunch has heightened - namely the increased difficulty of obtaining liquidity.

Many in the project finance community have been making very pessimistic noises about the chances of Europe's bigger transport deals reaching close. Perhaps the Liefkenshoek deal has shown that where there's a will - and a bit of crafty deal-making - there is a way.

The project at a glance

Project Name	Liefkenshoek Rail Tunnel
Location	Antwerp, Belgium
Description	Construction and maintenance of the civil infrastructure for a new 16.2 km freight-only railway linking the western docks and eastern docks of Antwerp
Sponsors	Locorail consortium:  BAM PPP - 50 per cent  Vinci Concessions - 25 per cent  Belgium's CFE (47 per cent owned by Vinci) - 25 per cent
Project Duration (Including construction)	42 years
Construction Stage	4.2 years
Total Project Value	€841 million
Total equity	€81.8 million
Total senior debt	€616.6 million
Senior debt breakdown	EIB: €313.3 million  Bank club: €313.3 million
Agency loans	EIB: €113.3 million guaranteed by commercial bank club  €200 million unguaranteed
Mandated lead arrangers	Bank Nederlandse Gemeenten (BMG) BayernLB Fortis Grupo Santander ING Societe Generale Corporate and Investment Banking
Legal Adviser to sponsor	Freshfields Bruckhaus Deringer
Financial Adviser to sponsor	ING Wholesale Banking
Legal adviser to banks	Clifford Chance
Legal adviser to government	Allen & Overy
Financial adviser to government	Deloitte
Technical adviser to lenders	Mott McDonald
Date of financial close	5 November 2008