IJ half year 2006 transport review

IJ Reseach & Analysis' half year tables show a 2.5 times growth in transport project finance on the first half of 2005 - IJ features editor Simon Ellis and research associate Vander Caceres explain the trends driving the sector.

The transport sector has dominated infrastructure finance in the first half of 2006 - with a series of large acquisition deals featuring prominently.

IJ Research & Analysis calculated that transport transactions - including transport PPPs - attracted US$34.23 billion, 34.7 per cent of all project financing by volume in the first half despite comprising only 15 per cent of the overall number of deals.

The surge stems from a number of large privatisations in the French toll road sector and the close of two large US highway deals.

Even excluding the French concessions, the figures are up significantly on the corresponding period in 2005 owing to a widening geographical spread of toll road deals - particularly in the Americas which witnessed growth of nearly 700 per cent on H1 2005.

The year saw financial close on the first transport deal in the Dominican Republic - US220 million Autopista de Norte highway - and the first deal in a breakthrough infrastructure securitisation programme in Mexico - the US$512 million Mexico-Toluca toll road.

The most significant regional trend was the opening of two US state markets with the close of the US$4.65 billion Indiana toll portfolio and US$605 million Pocahontas Parkway road.

Graph 1: Global project finance by sector (click to enlarge)

The transport sector was particularly lifted by the scale of the two standout closes of the 2006 - the French government's divestment of toll operators SANEF and APRR to Abertis and Macquarie/Eiffage respectively for a total of US$19.13 billion.

Gavin Munro, managing director of project finance at Société Générale, told IJ Research & Analysis, 'The French toll road privatisations were a huge fillip to the market.'

Overall, the sector's growth on the same period the previous year was 248 per cent - outranking even a petrochemicals sector boosted by the close of five deals in the Middle East.

Table 1: Top ten global transport projects (click to enlarge)

Acquisition financing deals - including acquisitions of existing transport assets from government - accounted for 74 per cent of all volume, while greenfield projects absorbed 17 per cent of total volume and refinancings nine per cent. 

Richard Games, executive director of WestLB  states that the growth in acquisitions is partly due to project finance desks taking on multi-billion transport asset transactions which would previously have been funded by other departments. 

'There are a lot of acquisition deals that would have been done in the leveraged finance market which are now been done through project finance as a way of unlocking value,' he says.

Games predicted that short-term bridge financing of large infrastructure deals would remain a significant trend in the second half.

Pie Chart 1: Breakdown of Transport Deals by Project Type

Gavin Munro of Société Générale claimed the pace of infrastructure acquisition financing was unlikely to slip in the second half as a swathe of newly established infrastructure equity funds attempt to capture existing assets.

''With all these equity funds chasing a relatively small number of new build deals there are going to be a lot of acquisitions - especially around the fringes of traditional infrastructure,' he said.

Table 2: Global transport by financing method (click to enlarge)

Globally, transport proved a rich vein for the monolines whose growing involvement was a salient trend in the sector - overall wrapped-financing accounted for seven of the 25 deals worth a total of US$2.94 billion.

Importantly, the wrapped deals included three new build projects - the US$494 E18 Norwegian Toll Road PPP, the US$430 Golden Ears bridge and the US$106 million M1 Westlink DBFO. 

However the most significant monoline transaction was MBIA's wrap for the refinancing of local currency bonds funding the Mexico-Toluca Shadow Toll.

The monoline rates the prospects for Mexican infrastructure so highly it has set up a US$2.3 billion shelf programme to guarantee future transactions in the market.

Some project financiers have raised doubts that monolines will ever have a high enough ceiling to wrap the large acquisition deals on the scale of the French toll road privatisations.

However, Gavin Munro predicts that monolines would be likely to play an important role in another important future trend as tightening margins on wrapped loans began to eclipse bond financing. 

'The future is monoline-wrapped bank debt' he says, 'The capital markets are to be pushed hard to respond.'

Graph 2: Transport project finance by region (click to enlarge)

Table 3: Transport Project Finance Volume by Region

Western Europe was the largest region for transport, however growth on H1 2006 was most marked in North America and the Asia-Pacific.

In terms of future potential, the single most important development was the opening of the US state road markets with the close of the US$4.65 billion Indiana and US$605 million Pocahontas Parkway roads.

Also in the Americas the close of the Golden Ears bridge continued the impressive buoyancy of British Columbia's appetite for infrastructure while the Autopista de Norte became the first transportation deal in the Dominican Republic.

The strong performance of transport is expected to be at least partially repeated in the second half of 2006.

The next six months are expected to see the close of a number of significant new build projects including the A8 - the first of the German HGV-tolling A-Model roads - and South Africa's Gautrain project.

Volume for second half acquisitions is expected to come from Ferrovial's BAA airport acquisition with a deal to acquire London's City Airport could also feature.

Toll road programmes in Austria, Slovakia and Hungary are also expected to register in the medium-term while a two-way restructuring of the Irish toll road operator National Toll Roads is mooted for 2007.