Financing the Third Bosphorus Bridge

Author: Danielle Myles | Published: 8 Jul 2014
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Deal counsel explain why the funding of a railway and highway across the Bosphorus gives Turkish project finance cause for optimism

The Turkish government has accepted a number of rarely used deal mechanisms to ensure a landmark bridge that connects Garipce in Europe to Poyrazköy in Asia reached financial close.

The unique characteristics of the Third Bosphorus Bridge meant it was awarded to the project sponsors via tender, and used a highly tailored structure.

Of all the project finance models, it is most akin to a build-operate-transfer (BOT) project. But the ten year and two month concession period could have created added risk for the lenders, especially as 30 months of which was dedicated to construction.

As YükselKarkinKüçük partner Muharrem Küçük says, the huge political commitment towards completion of the project led the government to take on some rare undertakings.

"It is quite a difficult deal from a credit perspective for the lenders as it has a fairly short concession period," explains DLA Piper partner Tamsyn Mileham. "But the sponsors and government therefore made concessions, and the lenders were quite flexible in their approach in how to deal with it."

Government undertakings

This flexibility was built into the deal via a debt assumption agreement, guaranteed minimum traffic payments, and a direct agreement.

Tear sheet

The $2.3 billion senior debt financing of the Third Bosphorus Bridge Project closed on May 21 2014. Construction is expected to finish by the end of 2015. The BOT project was funded by a syndicate of six local banks, and the debt-to-equity split is 80:20. The finance documents are governed by English law and the other transaction documents are governed by Turkish law. Total project costs are $2.9 billion.

Sponsors – IC Holding and Astaldi – were advised by YükselKarkinKüçük and DLA Piper on Turkish and international law. The firms worked in tandem from their joint offices in Istanbul.

The banks' international counsel was Clifford Chance and local counsel was Verdi Law Firm.

A debt assumption agreement is an undertaking by the Treasury to repay the financing – either via a single step or installments – if the borrower defaults. Historically, the government has been reluctant to provide such guarantees, typically reserving them for projects of national importance. A testament to the Third Bosphorus Bridge's importance is the fact it is only the third project in the country to benefit from such an arrangement.

Efforts, on paper, to change this could have created hiccups for the bridge project. "The legislation relating to the availability of debt assumption agreements changed at the end of the project just as we were finalising the negotiations on the debt assumption agreement. This created a bit of a last-minute hurdle," says Mileham. This requires some guarantees from the sponsor and imposes a haircut in the case of a termination payment. But as the Treasury's agreement relating to the Third Bosphorus Bridge was built into the tender, the availability of the debt assumption was not directly impacted by the incoming law.

Direct agreements between lenders and the government are also a new concept under Turkish legislation, says Küçük, but the government accepted this request of the lenders.

The project consists of a railway and toll-road. Rather than being a demand-risk project, the sponsors obtained commitments from the government for availability payments. If the level of traffic and tolls specified in the tender agreement is not met in any single year, the transport ministry will meet the shortfall.

These agreements meant the government and sponsors took on more of the risk during the construction period. But this was mitigated by the presence of Hyundai as the bridge contractor. The local experience of the two sponsors – Turkey's IC Holding and Italy's Astaldi – also meant the lenders were confident that the project company would deliver.

Finance

These concessions made the project an attractive prospect for a large number of lenders. It proved so popular that the $2.3 billion of senior debt needed to fund the project was raised from six Turkish banks, with no need to tap the international markets. "As this is such an important deal for Istanbul and Turkey, it is impressive to see the commitment of the local banks in funding a project financing of this size," says Mileham.

Regulatory approvals

Obtaining the relevant environmental permits and licences can be a time consuming exercise in Turkey. But for this project they were issued without any difficulties, which paved the way for construction to begin.

In fact, as the senior debt financing replaced a bridge loan that had been in place for around six months, construction commenced around half a year ago.

Breaking records

The Third Bosphorus Bridge is one of the country's most visible and prestigious projects. At 1.4 kilometres long and with eight lanes spread across 60 metres, it will be world's widest bridge and longest suspension bridge. It also involves the construction of 120 km of roads at either end of the bridge. The railway consists of 1,048 metres of track.

About the contributor
 

Muharrem Küçük
Partner and head of finance & projects

YükselKarkinKüçük
Attorney Partnership

Istanbul, Turkey
T: +90 212 318 05 11
M: +90 533 597 60 36
E: mkucuk@yukselkarkinkucuk.av.tr


About the contributor
 

Tamsyn Mileham
Partner

DLA Piper

Istanbul, Turkey
T: +90 212 340 05 86
M: +90 533 235 89 97
E: tamsyn.mileham@dlapiper.com