The A11 motorway PPP in Belgium is the third project to close with the European Investment Bank’s project bond credit enhancement (PBCE) product, which is in its pilot stage. It is both the first greenfield and the first transport project under the scheme. The project sets a precedent as the first PPP in Belgium to be wholly financed with a project bond. Furthermore, the A11 is only the second project in Europe to feature a deferred drawdown structure for project bonds, providing significant cost savings through the mitigation of negative carry.

The Project

The Via A11 fills one of the so-called missing links in Belgium’s motorway network. The 13km highway will connect the Port of Zeebrugge with the E40 and E34 roads in western Flanders, going between Bruges and Knokke. The road forms part of the EU’s TEN-T pan-European transport network. There will be approximately 90 civil structures of varying complexity, including a 1km viaduct and twin bascule bridge. The existing road is heavily congested and delays freight and tourism access to the East Flanders coast.

Via-Invest, on behalf of the Flemish regional government, awarded a 33.5 year concession to Via Brugge to design, build, finance and maintain the road. The sponsor will receive regular availability-payments.

Project company Via A11 is owned by Via Brugge (61 per cent) and the government agency Via-Invest (39 per cent). Via Brugge comprises Jan de Nul (39 per cent), DG Infra+ (50 per cent) along with local contractors Aswebo, Franki Construct, Aclagro and Van Laere.

The Financing

On 21 March 2014 Via A11 made the first bond issuance. Allianz Global Investors and the EIB as anchor investor committed to the €577.9 million of 32-year senior amortising bonds. Allianz GI will take €433 million, whilst the EIB purchased €145 million. The senior bonds priced at a fixed coupon of 4.49 per cent, which was set in the procurement phase. The bonds mature in 2045.

In addition the EIB provided a revolving letter of credit for €115 million, equivalent to 20 per cent of the senior debt. The letter of credit is a first-loss subordinated layer and offers additional liquidity. It will reduce to 10 per cent after construction ends in 2018. With the benefit of this enhancement, Moody’s rated the senior debt A3, which was an uplift of three notches from Baa3.

Deutsche Bank acted as global coordinator, whilst the joint lead managers were BayernLB, Belfius and Deutsche. Deutsche Trustee is bond trustee and security trustee.

The initial bond issuance was a €287.5 million private placement, and the remainder will be drawn in quarterly installments during construction. By the end of the construction period all of the senior debt will be listed on the Luxembourg Stock Exchange.

The option for sponsors to defer drawdowns previously set apart the capabilities of traditional bank lending and project bonds. The new structure bridges that gap and allows significant savings for borrowers through mitigating the cost of carry, whilst also offering the competitive pricing from institutional investors.

The sponsors will provide shareholder loans of €75.6 million and €4 million of pure equity. The debt-to-equity ratio is 88:12. The nominal construction cost is €550 million.

The senior debt amortises semi-annually post-construction and Moody’s projects average debt service coverage ratio of 1.25x. In addition to the EIB letter of credit, there is a six month debt service reserve account and a three year forward maintenance reserve account.

The Future

Allianz GI has been a pioneer for the entry of institutional investors into infrastructure debt. In 2013 and 2014 Allianz GI has financed three greenfield motorway projects during construction phase as the primary investor – the L2 Marseille, the M8, M73, M74 and the A11. Allianz GI has now twice implemented the innovative deferred payment schedule, also for the M8, M73, M74 Scottish motorway project in February 2014.

The cost saving through deferred drawdown does however rely on the strong credit rating of the institutional investor, a facet which the market is already evolving to accommodate. Allianz is rated and its credit profile did not constrain the deferred payments at all.

Allianz was first to utilise the new structure but since the A11 closed, Pension Insurance Corporation (PIC) has succeeded in implementing it for the North Tyneside housing PFI in the UK. Assured Guaranty provided a guarantee on PIC’s deferred payments, which was necessary for the structure in that case owing to PIC being unrated.

The EIB credit enhancement product has proved its capability for greenfield risk. The EIB bond solution won out as the best value product in full competition with traditional bank solutions, with the margin set during procurement.

The EIB came in as an anchor investor on market terms very easily as was needed, and this sped up the transaction reaching close. Transport projects in Germany, Ireland and Italy are lined up to use the credit enhancement product next.

Advisers

Via Brugge was advised by Grontmij (technical), Stibbe and Clifford Chance (legal), Deloitte (financial) and Vanbreda (insurance).

The bondholders’ advisers were Steer Davies Gleave (technical), NautaDutilh (legal) and Marsh (insurance). White & Case provided legal advice to the EIB.

Freshfields was legal adviser to Deutsche, BayernLB and Belfius.

Via-Invest and the Flemish government were advised by Technum / Arcadis (technical), Allen & Overy (legal) and Rebel (financial).