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