The last year - 2005 - marked a turning point for project finance in France. It turned out to be a monumental year that saw the French government finally address the issue of a wider adoption of PPP-style investment - with the first real transport projects making it to financial close

The first demand-based rail concession since Eurotunnel to close in France was achieved last February with the €1.2 billion Perpignan-Figueras high speed rail link, linking France to Spain. This was followed by France's largest private financing in the motorway sector, the A41 toll motorway which concluded in November 2005, with a private sector investment amounting to €870 million.

On top of that, the French transport sector was all the more impressive for it being the year that the French government decided to sell off its stakes in three toll road operators - a deal that is expected to raise close to €13 billion (US$15.2bn) and bring in funds that the French treasury desperately needs.

The three schemes which were launched by the government in August (and closed in November) include the sale of:

• 50.37 per cent stake in Autoroutes du Sud de la France (ASF)
• 70 per cent stake in Autoroutes Paris-Rhin-Rhône (APRR)
• 75 per cent stake in the Societé des Autoroutes du Nord et de l'Est de la France (Sanef)

The French market has been blossoming for some time - though many believe its failure to win the 2012 Olympic Games has proved to be a slight stumbling block as it would have given project finance a shot in the arm with a pipeline of impressive deals to act as a guiding light to the rest of the country.

However, the importance of the projects tendered, awarded or concluded, in a variety of sectors - ranging from roads to hospitals, and from HSL projects to prisons - has also helped the French market forge what should be the main features of a French market practice for the next few years.

The year 2005 has seen the development of new sets of contracts and standards, in particular in terms of risk allocation between the public and private sector, and in terms of liability caps between the project sponsors and the SPV.

In October 2005, the French government announced that it had identified more than 35 government projects of a value in excess of €9 billion which should be tendered out under its new legislation.

While transport projects served as a spearhead for the French market last year, the A41 stands out for as an essential political, commercial and economic link between France and Switzerland and its impact will be felt on an international level.

Of the four roads that were brought to market at the same time that had to go through the public tender process - the A19,  A28, A41 and Millau Viaduct - only two were project financed (A28 and A41) and those were done in completely different manners.

The A28 was monoiine-wrapped by FSA and financed through the capital markets; Millau Viaduct was awarded to Eiffage through a corporate solution, so the product was never presented to the market; and the A19 was awarded to Vinci, also through a corporate financing solution.

This makes the A41 all the more pivotal for project finance in the French roads sector, especially with two roads - A65 and A88 - currently going through procurement.

Rationale

The new road will provide a direct link between the two cities in France and Switzerland – Annecy and Geneva. Currently there is only a national road – RN201 – linking the two and it is heavily congested.

The route is popular as many people live one side of the border and commute to work in the other country. The only alternative to the national route is a motorway that adds a fair distance to the journey, but the upside is that there is less traffic.

At only 19km in length – although it does include construction of a major, twin-tube tunnel and four bridges – the road will greatly reduce the commute time and ease congestion.

It will also carve miles off the national route and vastly shorten the alternative motorway that is currently favoured by so many commuters.

On each end of the new road, the motorway will plug into existing major roads of the new cross-border toll road.

Advisory

IXIS Corporate & Investment Bank - which is pretty much cornering the market for advisory roles on transport projects in France - acted as adviser to and coordinator for ADELAC - the SPV.

This role that includes:

• the choice and optimisation of financing structure, including hedging instruments
• supporting the consortium in its talks and negotiations with the licensing authority
• selecting the banks, and assistance in the negotiation of the terms of the financing up to its closing

The project

This road has an interesting history as it was first awarded in 1995 to the concessionaire Société des Autoroutes du Tunnels du Mont Blanc (ATMB) and then deemed by the Conseil d'Etat not to be consistent with French procurement laws.

It was withdrawn from the concessionaire, held up for three years and then put out to public tender. Then in 2003 it was picked up by ADELAC - a consortium made up of:

• the highway operator AREA (APRR group)
• Bouygues Construction
• Setec (technical partner)
• Caisse d'Epargne des Alpes (regional savings bank)

The early construction work - preparing the entrance to the tunnels - and more than 90 per cent of the land acquisition had been completed by ATMB, valued at a little under €100 million. The first concessionaire was fully reimbursed for this work.

The mandated lead arrangers were identified by adviser IXIS in time for the bid submission in December 2004, and the ADELAC consortium was confirmed preferred bidder in March 2005.

ADELAC won the deal on 27 October 2005, signing a contract for the concession, including the design, construction, financing, operation and maintenance of highway A41 for a period of 55 years.

Financial close was achieved promptly - by 24 November.

Financing

This is not the first mini-perm financing of a transport project to close in France as the Perpignan-Figueras HSL was financed on this basis, but it was closed on a shorter term basis - eight years (with an option to extend for two years), compared to 13 years flat for the rail link.

Procurement for the A41 between Saint Julien end Genevois and Villy-le-Pelloux closed less than one year after remitting their offer to the French government for the 55-year concession.

The SPV was selected as preferred bidder in March 2005 and includes:

• AREA (49.9 per cent)
• Bouygues (46.1 per cent)
• Setec (2 per cent)
• Caisse d'Epargne et de Prévoyances des Alpes (2 per cent)

The MLAs - which each took an equal share of one third of the debt - include:

• Bank of Scotland
• Calyon
• HSBC

In addition to serving as an MLA, Calyon was also documentation bank, facility and security agent, bookrunner and global syndication coordinator.

The total project cost came in at a cool €870 million (US$1.027bn), with a total debt of €940 million (US$1.109bn). It was broken up into four tranches:

• Tranche 1 - term facility €698m (US$824m)
• Tranche 2 - standby facility €32m (US$38m)
• Tranche 3 - VAT facility €40m (US$47m)
• Tranche 4 - equity bridge €170.5m (US$201m)

At synidication, the debt has been offered out at 35 basis points for €50 million and 25bp for the next €35 million. The margins on the price of debt are set at between EURIBOR plus 110bp during the construction phase and EURIBOR plus 90bp during operations.

Calyon's Cecile Aublette says: 'The innovation within the structure allowed the consortium to submit and offer without any subsidies, although the state was offering subsidies.

'This has been done through a mini-perm structure with long-term refinancing. We have assumed the debt flows along the entire 55-year concession, trying to maximise the revenue over the 55 years.

'This enabled the consortium to raise enough debt to put in an offer without any subsidies.'

Legal

Lovells acted as legal adviser to the project while Freshfields was instructed by the lenders. The deal kept the lawyers busy, throwing up its fair share of legal issues as it is the first road in France to be project financed without any public subsidy.

Jean-Marc Allix, senior associate at Freshfields in Paris, says: 'It was possible to close this project as the financial structure was optimised by having a mini-perm facility. The duration of the main term loan is eight years, which can be extended for four more years - so the maximum duration is 12 years.

'The main idea behind that is that it is expected that it will be refinanced after the ramp-up period. As soon as construction is over and the ramp-up period is over, the profile risk will be totally different and you can expect it to be refinanced.'

Lovells' Jacques Bertran de Balanda tells IJ News: 'The project ran smoothly because we had a cooperative team that wanted to get the deal to close swiftly, handling the right issues in a professional manner. It was not easy as their were some tough issues, but the real issues were dealt with and we didn't beat around the bush.'

Conclusion

The road was seen as being essential to ease the congestion on an over-used route linking the Swiss city of Geneva and France's Annecy. A longer motorway route was being turned into a 'rat run' by commuters looking to avoid traffic jams on the over-burdened national road. This in turn was putting additional pressure on the other motorway, creating a false demand.

The A41 was seen as the only solution to the problem, taking the bull by the horns and running a toll motorway direct from the two cities and putting an end to the problem once and for all.

For now, the industry is keeping an eye on developments in France with the A65 - for which bids were submitted at the end of last year and is due for an announcement in coming weeks - on the horizon. After that the 28km A88, a small section of road in Normandy plugging in to one end of the A28, will be rolled out once again - coming to market in early 2006 after having first been rolled out in traditional French style and then scrapped.

As IXIS's Benjamin Sirgue says: 'The new motorway project market is very competitive in France and there is a fair amount of competition between corporate and project finance structures.

'It is good for the project finance industry that the A41 went ahead with a project finance solution because we are competing with the bidders who submitted a corporate solution. We proved that the corporate solution is not always the winning solution.'

The project at a glance