Deal analysis: Funding France’s biggest concession

Sponsors, banks and public authorities have started on the ‘long and winding road’ to reaching financial close for the €7.8bn high-speed rail line connecting Tours and Bordeaux. But is an end of year deadline too ambitious to gather €1.6bn in commercial debt and some €800m in equity?

“We have started on the long and winding road to reaching financial close for Tours-Bordeaux,” a source involved in the negotiations to close France’s €7.8 billion high-speed rail concession between the two French cities told Infrastructure Investor.

Tours-Bordeaux: trying
to secure €7.8bn before
the year ends

It’s an apt way to summarise the difficult period ahead to close France’s biggest concession to date. The 300-kilometre high-speed rail line was officially awarded in July by French rail agency RFF to a consortium of VINCI, AXA Private Equity and French bank Caisse des Dépôts (CDC), with RFF targeting an end of year deadline to close the deal.
If Tours-Bordeaux is already France’s biggest concession to date it is also likely well on its way to becoming one of the country’s most complex concession deals.
Just consider the number of entities involved in closing the project. In addition to the three sponsors and their respective advisers, you have the central government, RFF, several regional authorities, the European Investment Bank (EIB), CDC’s managed savings (Fonds d’Epargne), the bank club backing the deal (and respective advisers), as well as France’s PPP unit – MAPPP – which is coordinating the application of the government’s debt guarantee for the project.
On top of the logistics of ensuring that all parties communicate effectively, there is also the very obvious difficulty of securing the €7.8 billion needed to actually pay for the project. As it stands, a rough breakdown of the financing structure being discussed looks something like this:
–          Close to €4 billion in upfront subsidies from the central government and local authorities;

–          Roughly €1.6 billion in commercial bank debt (with up to 80 percent of that debt guaranteed by the French government);

–          Close to €800 million in equity from the sponsors, or about 10 percent of the project’s cost;

–          About €750 million in savings managed by state-backed CDC, to be used post-construction;

–          And a €600 million loan from the EIB.

Delving into each of these tranches reveals further layers of complexity. For example, it is not yet known how much of the €4 billion will come from the central government and what portion will come from the regional authorities.
In fact, environment minister Jean-Louis Borloo will be in Bordeaux today to discuss this and other rail-related issues and evaluate the progress achieved by Claude Liebermann, the ministry’s special envoy to the regional authorities. Liebermann is trying to get the regional authorities to contribute €1.7 billion of the €4 billion tally, but as he admitted to the French press recently, “we are making progress, but not everything is done yet”.
Another potentially complex issue concerns the size of the equity cheque required of the sponsors. At close to €800 million, that would leave the three sponsors to write individual cheques of more than €250 million each, a large equity amount. That may require them to seek outside equity investors to help top up the 10 percent of the project cost they are required to finance.
And even though up to 80 percent of the €1.6 billion in commercial bank that is being earmarked for the deal can be guaranteed by the French government, it is still a sizeable amount to raise, even under favourable conditions.
All of which begs the obvious question: Will Tours-Bordeaux be able to reach financial close before the year is out, as RFF intends? One of the sources involved in the deal suggested that might be a hard deadline to keep, even though he stressed that is the deadline all the parties are working toward.
Given the complexity of the task ahead, though, don’t be surprised if financial close slips to the New Year.