Slovakia’s first PPP in €1.2bn refinancing

The bond issue by R1 Expressway, a project jointly managed by Vinci and Meridiam, received an investment grade rating from Standard & Poor’s yesterday.

The Granvia consortium, the concessionaire for the project to design, build, operate and manage four sections of Slovakia’s R1 Expressway, intends to issue €1.2 billion worth of bonds to refinance existing debt.

Co-owned by French developer Vinci and fund manager Meridiam Infrastructure, Granvia entered into a concession for the project in 2009, in what was the first public-private partnership (PPP) agreement to be signed in the country. The road became operational in September 2012, and the concession now runs until July 2041.

The proceeds of the bond issue will be used to refinance a senior secured loan that was closed in August 2009 as well as pay for the swap breakage costs associated with pre-payment of existing debt. The bonds are due to mature in 2039.

The project was granted a BBB+ rating by Standard & Poor’s, two notches above the minimum rating needed to qualify for investment grade. In a report, the agency underlined the stability of the project’s availability-based revenue streams, as well as the absence of material construction risk and strong break-even thresholds for other key project risks.

After a shaky start, relationships between the project’s off-taker – the Ministry of Transport, Construction and Regional Development – now stand on strong foundations, the rating agency said. It also pointed out that debt would mature two years before termination of the concession, protecting future bondholders from concession hand-back requirement risks.

The strengths were somewhat offset by a number of uncertainties, largely linked to the untested nature of Slovakia as a PPP market. The project also had a highly leveraged capital structure, the agency said, with senior debt representing 89 percent of total capital.

Standard and Poor’s still maintained the project’s rating outlook as stable, anticipating a stable operational and financial performance, as well as declining commercial and contractual disputes, over the next 12 months.

The announcement will provide encouragement to other Central and Eastern European states, whose governments are gradually turning to the PPP model to help upgrade ageing infrastructure.

As the European Bank for Reconstruction and Development underlined in a research paper this summer, many of the region’s countries continue to struggle to implement best practices, a consequence of poorer regulatory, legal and institutional frameworks than in more established markets.