A capital restructure, long loan tenor and limited sponsor recourse has enabled one of the Caribbean’s biggest toll road financings to close in Jamaica – despite the country’s economic turmoil.
A club of multilaterals provided an 18-year $285 million limited recourse financing for the expansion and refinancing of the government’s ambitious Highway 2000 Project. The project is in its early stages of connecting the island through a network of toll highways.
The sovereign risk presented by Jamaica’s negative economic growth and debt burden, plus its minimal international project finance experience meant the deal offered little for commercial banks. But the lenders saw a bankable project.
“There was a lot of complex financial engineering that was put into place in connection with some of the predecessor financing,” said Chris McIsaac, a Washington DC-based partner with Clifford Chance who acted for the lenders.
The concession required the government to financially support the project through state-owned National Road Operating and Construction Company (NROCC). NROCC’s previous financings had been heavily negotiated into various subordinated and senior debt tranches and it was obliged to fund $15 million for this phase.
The lenders negotiated for NROCC’s existing and future participation to be converted into a preferred equity stake. Discharging project company Transjamaican Highway’s (TJH) debt required tax remissions from national tax authorities, but it simplified the capital structure.
It was also needed to allow for new TJH shareholders. Policy requirements required two lenders, International Finance Corporation (IFC) and Proparco, to take $7 million common equity stakes in TJH.
Having half of the lenders holding common equity rather than a more subordinated type of debt raised some issues. “We had some interesting intercreditor discussions,” said McIsaac. But this was the only way for IFC and Proparco to satisfy their programmatic restrictions.
IFC has a C loan product which was created for this purpose. It allows IFC to provide quasi-equity financing without raising these intercreditor issues. But this product didn’t work under Jamaican tax laws.
Another potential issue was NROCC’s preferred equity stake, making it a risk absorber of last resort in some aspects of the project. Given the size of the debt and Jamaica’s economy, the government’s credit is questionable here. Making NROCC’s $15 million investment a condition precedent to disbursements under the facility was one way for the lenders to mitigate this.
“We knew all the base equity was in at financial close and the lenders just took a commercial view in terms of the government’s future obligations in respect of the project,” McIsaac said.
The facility’s long tenor also helped the deal’s bankability. For the sponsors Bouygues Travaux Publics and Vinci, the tenor maximises the debt carrying capacity of the project. A statement by the sponsors’ financial advisor Astris Finance said a cash sweep mechanism has been set up which may extend the tenor even further.
Sovereign risk aside, the concession agreement gives participants in future Jamaican projects reason to feel encouraged. McIsaac said it was well structured and detailed. “Its risk allocations were spot on from the perspective of a project finance lawyer,” he said.
The government initially wanted a larger facility, but the lenders made clear this wasn’t viable for them. The sponsor/government negotiations that followed pushed out the deal’s timeframe so that it closed more than 18 months after Clifford Chance became involved.
This could have been problematic as the refinancing was of locally issued infrastructure bonds partly maturing in February 2011.
Risk allocation
The facility is limited recourse and NROCC’s shareholding means it now shares the sponsors‘ equity support commitments, including for cost overruns.
The constructor, Bouygues Travaux Publics’ local branch, assumes the completion risk under a turnkey EPC contract. The civil engineering for toll roads is less complex than for power or resource projects, which lessens construction risk. But geotechnical (subsurface) conditions are not absorbed by the contractor. Site testing and sufficient cost overrun commitments enabled the lenders to get comfortable with this.
This being a brownfield project lessens overall project risk, including through the cashflows generated by the operating toll roads. But Fabrice Henry, managing director of Astris Finance, said in a company statement that a sizeable portion of the facility refinancing the operating phase introduced traffic risk issues. He added that contingent liquidity lines made the lenders comfortable with that risk during construction.
There was no political risk insurance.
Tear sheet
February 28
Project company Transjamaican Highway closed its $285 million, 18-year, limited recourse, senior secured financing by a club consisting of EIB, IDB, IFC and Proparco. The funds are for the Bouygues Travaux Publics and Vinci-sponsored Transjamaican Highway Project – a network of toll highways to run across the country. The money will refinance a completed and operating phase (1a), and fund a new 10 km expansion phase (1c) that will extend to the city of May Pen.
The operator is a joint venture between the sponsors, and the constructor is the local branch of Bouygues Travaux Publics.
2001
NROCC awards Bouygues Travaux Publics a 35-year build-operate-transfer concession to develop the Transjamaican Highway Project.
Lenders’ international counsel: Clifford Chance
Lenders’ local counsel: Myers Fletcher & Gordon
Sponsors’ counsel: In-house
NROCC’s counsel: Allen & Overy