The Macquarie Korea Infrastructure Fund (MKIF) has closed the refinancing of its existing US$96 million loan facility in South Korea - the Daegu East Circulation Road Company (DECRC) - a concession company which operates the Daegu 4th Beltway

The transaction highlights the ongoing opportunity in Korea where Infrastructure investment is expected to reach US$300 billion over the next 20 years with more than half dedicated to the transport sector.

The development of roads in the Republic of Korea started after the war on the Korean peninsula. The closed economy of Korea, the lack of financial resources and the mountainous terrain in most of the country constrained road network development.

The total length of the road network is 31,200 kilometres out of which only about 10 per cent is paved - giving a further reason to bring in more private investors to build and operate roads. The road network carries the majority of domestic freight  - with freight expected to increase significantly over the next ten years.

Korea has responded to the deficits by offering transport deals under the Rehabilitate Operate Transfer (ROT); Rehabilitate Lease or Rent Transfer (RLT) and Build Rehabilitate Operate Transfer (BROT) concession models.

Almost uniquely for a foreign-owned entity, MKIF has achieved significant market penetration in Korean transport infrastructure and has invested in a total of nine projects to date.

It currently holds interests in the following companies, which own operating toll road concessions:

• New Airport Highway Company - owner of the concession for the Incheon International Airport Expressway - 24.1 per cent equity and a subordinated loan commitment of US$55.7 million
• Baekyang Tunnel - owner of the concession for the Baekyang Tunnel - 99.2 per cent equity and a senior loan commitment of US$134.1 million
• Kwangju Ring Road - owner of the concession for the Gwangju Second Beltway, Section 3-1 - 75 per cent equity and a senior loan commitment of US$79.1 million
• Kwangju Beltway Investment Company - owner of the concession for the Gwangju Second Beltway, Section 1 - 100 per cent equity in senior loan and subordinated loan and a working capital facility totalling US$196.3 million
• Woomyunsan Infraway Company - owner of the concession for the Woomyunsan Tunnel - 36 per cent equity
  Cheonan Nonsan Expressway Company - owner of the concession for the Cheonan-Nonsan Expressway - 60 per cent equity and a subordinated loan commitment of US$196.5 million
• Soojungsan Investment Company - owner of the concession for the Soojungsan Tunnel - 100 per cent equity and senior and subordinated loan commitments totalling US$101.9 million
• New Daegu-Busan Expressway Company - owner of the concession for the New
• Daegu-Busan Expressway - a convertible bond investment of US$34.5 million

As with the other concessions a private entity - Daegu Circulation Road Company (DECRC) - assumes the management of a publicly-owned enterprise for the contract period and assumes considerable investment risk.

MKIF owns 85 per cent of the equity in DECRC - through an intermediate holding company Macquarie East Daegu Investment Company (MEDIC).

The Project

In June 2005, DECRC was awarded the concession for an east circulation road in the Republic of Korea.

The project was financed by:

• Kookmin Bank
• Korea Life Insurance
• Kyobo Life Insurance
• Samsung Life Insurance
• Macquarie International Investment

The 7.25km Daegu 4th Beltway is the eastern section - and currently the only operational part - of Daegu City's proposed circulation road, which is designed to reduce congestion in the city.

The six-lane road project began construction in August 1997 and was completed in August 2002 with tolling operations commencing in September 2002.

The government authority is the Daegu City Government and the project has a concession term of 24 years - of which 19 years remain.

On 28 February 2006, Macquarie International Holdings entered into a Sale and Purchase Agreement to sell its interest in Macquarie East Daegu Investment Company (MEDIC) to MKIF.

The transaction was settled on 14 March 2006 and as a result of the sale, the bank was no longer required to consolidate its interest in MEDIC and its interest in the D4 Circulation Road in Korea.

Financing

On 14 March 2006, MKIF committed US$96 million to the Daegu 4th Beltway East project, consisting of US$62 million of equity and US$34 million of subordinated loans.

MKIF's equity investment was made indirectly through acquiring 85 per cent of shares in Macquarie East Daegu Investment Company (MEDIC), which in turn owns 100 per cent of DECRC - the project concessionaire.

In addition, MKIF acquired 85 per cent of the subordinated loan facility provided directly to DECRC. Korea Life Insurance Company is the 15 per cent shareholder in equity and sub-debt.

MKIF announced in April 2007 that DECRC - the concession company with the right to operate the Daegu 4th Beltway - committed to undertake a refinancing of its existing senior loan facility and amend the existing subordinated loan facility.

Although it was Kookmin Bank that was involved in the original deal - Shinhan Bank provided the new facility.

DECRC entered into a senior loan facility agreement with Shinhan Bank, which agreed to provide a new term loan facility of up to US$176.8 million.

The old facility that was refinanced had a principal outstanding of US$115 million.

As part of the refinancing, the interest rate on subordinated debt was increased to 17 per cent from 15 per cent.  There was no impact on the equity funding currently in place within DECRC.

Chul Hum Paik, representative director of Macquarie Shinhan Infrastructure Asset Management and the manager of MKIF, said:

'The new senior loan facility provided by Shinhan to DECRC allows DECRC to refinance its existing senior debt with a lower interest rate, and the increased facility limit provides DECRC with flexibility to draw down further amounts within the next 12 months, subject to the approval of the DECRC board of directors.

'The increase in the size of the total Facility reflects the strong cashflow generating capacity of DECRC and the protection offered by robust minimum revenue support (15 years of 79.8% minimum revenue support remaining) and termination payments,' he said.

Key details of the existing facility and the new facility are set out in the table below.

Conclusion

The refinancing of the loan facility was undertaken to allow DECRC to take advantage of the competitive debt capital markets in Korea and achieve a lower interest rate. 

It has also allowed DECRC to utilise its debt capacity more fully by drawing down a greater amount of the senior debt.

The transaction cements Macquarie's push into the Korean market with the financial close on its subordinated loan investment for the Kyunggi Highway Company - the concessionaire of the Seosuwon-Osan-Pyungtaek Expressway Project.

 The project at a glance