The amount of debt being directed towards Spanish projects is perhaps matched only by the amount of concrete being used, and has driven down margins. But new budgetary rules for public bodies have opened the door to PFI/PPP and bankers are seeking to introduce new financing techniques to other sponsors.
In the context of recent activity in Spain, which at times appears to be one big building site, project finance business in 2005 has not impressed everyone involved. "It has been slower than in other years," says one veteran of the market.
However, in a broader context the Spanish project finance market remains one of the most important in the world. According to Dealogic, the Spanish market ranked sixth globally in terms of project finance (including telecoms) with volumes of $4.6bn.
"I would say that we have had a very busy year," says Jose Maria Arana, head of project and export finance, Iberia, at Royal Bank of Scotland in Madrid, "certainly as far as infrastructure and wind power are concerned."
The Spanish market has continued to see its share of toll roads, but has also seen a wide variety of other financings. PFI/PPP has been headlined by the hospital projects in Madrid, but similar activity is underway in other regions, while police stations and court buildings are also being brought in the market.
And in the transport sector Spain has seen not only roads stretch out across the country, but tramway and metro projects in the capital and the Figueres-Perpignan high speed rail link project.
Away from infrastructure, Spain remains the number two market globally for windpower. Some 2,000-2,500 megawatts of new building continues every year with corresponding financing of Eu2bn-Eu2.5bn. Finally, regasification facilities are proving the main activity in the oil and gas sector.
Roads busy in Spain
Road building nevertheless remains the key source of infrastructure projects in Spain. The biggest infrastructure financing this year has been that for the Madrid Calle 30 project for a new orbital road around the capital.
Launched in June, the Eu2.5bn facility was split into a Eu1.35bn 30 year tranche and a Eu1.15bn 20 year tranche. Dexia Sabadell Banco Local, SG CIB and Caja Madrid were mandated lead arrangers. The pricing achieved was very low as the project is being sponsored by the city of Madrid.
Motorway activity has continued with hard toll projects such as the Cartagena-Vera highway in southern Spain, Autopista de Costa Colida (Autocosta), and the Madrid-Toledo project.
The latter was signed in June, a Eu378m 27 year loan with mandated lead arrangers Banco Espírito Santo, BCP, Caja Madrid, La Caixa and Mizuho. The project, which involves building an 81km highway, 60km of which is tolled, is sponsored by Corsam Corviam, Comsa, Azvi, Sando and Banco Espírito Santo.
The Cartagena-Vera project was signed the following month. The Eu532m seven year term loan, sponsored by Fomento de Construcciones y Contratas (FCC), is for the construction of a 114km highway, of which 97.7km is tolled. Banesto and Ahorro Corporación Financiera (ACF) were mandated arrangers.
However, one of the most interesting financings was at the end of 2004, when Caja Madrid closed the first bond financed securitisation of a shadow toll road in Spain. The Eu212m deal was to finance the construction of a 74.5km road between Tomelloso and Consuegra, near Toledo, the Autovia de los Viñedos.
The road is being built by a consortium comprising Auvisa, Acciona, Constructora Sarrion and Caja Castilla la Mancha Corporación. Auvisa has a 30 year concession to build and maintain the road, for which it will receive a shadow toll based on traffic volume, with construction due to be completed in 2006.
Wrapped by XL Capital Assurance, the financing comprised a Eu103m loan from the European Investment Bank and a Eu64.1m bond. The underlying rating of both debt tranches was BBB- from Standard & Poor's (S&P) — the first time the rating agency had rated a toll road in Spain. The sponsors put in Eu44m of equity and Eu3.5m of subordinated debt.
Caja Madrid placed the bond privately with a group of Spanish investors — pension funds and savings banks. "The margin was between 40bp and 45bp over a treasury bond with the same maturity as the bond's average life, which is 16 years," said Iñigo Velazquez, an official at Caja Madrid, on the deal's closing.
This was considerably less than the 120bp typically seen on bank loans, according to Velazquez.
The Mintra case for PPP
One sector of the project finance market in Spain that is expected to grow is the use of public-private partnerships. This is partly a response to problems that public bodies have faced in their previous financing exercises.
In particular the Comunidad de Madrid has been forced to consolidate the debts of Madrid Infraestructuras del Transporte (Mintra), the public company responsible for building the capital's metro system, on to its balance sheet. These mainly relate to the construction of the Metrosur line to the south of Madrid.
"The new European rules are more strict in terms of consolidating debt for the public administrative bodies," says Javier Rodríguez-Arias, head of structured finance at Calyon in Madrid. "The problems arose when the Autonomous Community of Madrid had to consolidate billions of euros of debt because they hadn't looked at the PPP option for the construction of the new metro.
"They have therefore realised that in order to make their budgets more efficient they must share the risks with a private partner and those responsible for financing public works are now much more eager to contemplate PPP solutions."
This new mindset is already bearing fruit. Madrid launched its PPP hospital programme late last year with the financing for the Hospital Puerta de Hierro in the north of the city, with seven more to follow. Dexia Sabadell, ACF and ING are joint lead arrangers for the first hospital project, which is sponsored by ACS, Dragados, Bovis Lend Lease and Sufi.
"The first Madrid hospital project tapped the market recently," says Rodríguez-Arias, "and we will be tapping the market as well towards the end of the year or early next year with Hospital del Norte (San Sebastian de los Reyes) on which we are mandated and sole lead arranger.
"Another one will be awarded in the coming months, with the debt package probably coming in the first half of next year. So there will be many PPP deals in the market in the following 12 months."
This activity should signal just how the PPP/PFI market will evolve in Spain. "It is going to be very interesting to see what happens on the PFI side," says Eva Piera, head of loan syndications, Iberia, at SG CIB in Madrid, "as this has been the first time similar structures to UK PPP/PFI are emerging in the Spanish market.
"But although there have been eight hospitals tendered in 2005 by the regional government of Madrid, the financings have not yet arrived in the market, so we are yet to see exactly what type of structures and pricing there is."
Feeling the squeeze
Project finance sponsors, like borrowers in other sectors of the loan market, have been able to profit from the sea of liquidity in the banking system, whether on the balance sheets of domestic or international players, to extract favourable terms from the market. This is true on both pricing and structural levels.
"In the project finance market you see more and more banks willing to live with looser cover ratios, more aggressive capital structures and longer tenors," says Piera at SG. "So it is not only a question of pricing, which continues to decrease, but other factors, too.
"Generally speaking, but especially in structured loans credit risk has deteriorated because banks appear to be capable of accepting issuers' every last demand in order to maintain a senior role in the transaction and a strong and visible relationship with the client. But in spite of the fierce competition among banks, I am not sure whether this can go any further."
This has been the case in, for instance, the wind farm sector. One example was the financing for the Eu387m financing for the Proyectos Eólicos Valencianos wind farm project, for which Bancaja, Endesa and Senda Ambiental are sponsors and Banco Bilbao Vizcaya Argentaria, Calyon and Banesto bookrunners.
"What we have seen here is that the type of pricing on such projects is now below 100bp," says one banker involved in the deal, "while some two or three years ago it was well above the 120bp or even the 125bp threshold."
The structuring has also moved in favour of sponsors. "You can now do this perfectly well with 10% equity and 90% debt, which is obviously good for the sponsors," says the banker. "But it is incredible because just two years ago it was unthinkable to see something that did not have at least 20% or 25% equity.
"And cover ratios have come down, too, especially in the first years. You now have to accept more room for manoeuvre for a longer period."
On top of this, sponsors are able to extend the term of their finance. "While one or two years ago these wind farm projects could be financed on a 13 year basis, they are now going to 17 years," says a project finance banker in London. The term of the Proyectos Eólicos Valencianos financing was 18 years.
"A combination of all these factors has made conditions much more favourable for project finance sponsors not only in wind farms," says the banker, "but in toll roads and other sectors, too."
New finance projects
The generous terms available in the bank market have meant that, apart from the securitisation of the Autovia de los Viñedos, loans have been chosen over bonds every time.
"The problem that we have now in project finance is that due to current market conditions it is more expensive for clients to structure finance with bonds than loans and the terms are also less flexible," says Rodríguez-Arias at Calyon. "Sometimes the spread is more or less the same, but the clients want waivers and flexibility in general and bonds are less flexible, particularly with regard to the rating agencies' requirements."
The process of issuing a bond can also be more lengthy than arranging bank finance. "We have some project financings that are suitable for bonds," he says, "but the rating process is long and sometimes tedious. We believe that a good number of the deals now are ready to be investment grade, but the sponsors do not want to go through this process just for the sake of a few basis points because the flexibility is not sufficient in the resulting deals to make it worthwhile."
However, he is confident that things will change. "We believe that if market conditions change and the pricing of bonds improves versus loans and monolines, then there will be a decent amount of projects financed through bonds," says Rodríguez-Arias, "since on a global basis one-third of project finance is raised through bonds while here in Spain it is still marginal."
This hope may become reality through the introduction of more sophisticated structures into the Spanish market, borrowing techniques from other markets and financial products.
"If you consider toll roads," says Rodríguez-Arias, "there are revenues that are volatile that are subject to traffic risk, but there is an underlying base that is more or less consistent. You can finance that through a bond while loans can be used to finance the risky part.
"This is also the case with wind farm projects."