The spark that lights the fire

Spain’s Madrid-Toledo toll road bankruptcy proceedings could be emulated by the country’s 10 or so troubled concessionaires.

The reason why precedents are dreaded, especially in financial markets, is simple: they tend to set in motion chains of events whose outcomes are unpredictable, leaving investors to agonise over how to mitigate risk and salvage as much of their investment as possible.

Greece’s possible departure from the Eurozone is the most obvious example of this malaise. For all the voices arguing that the fallout from a Greek departure can be contained, there are as many warning that the consequences will be catastrophic. Truth be told, nobody really knows exactly what will happen if Greece breaks rank and leaves the Eurozone.

Much the same can be said for 10 of Spain’s most troubled road concessions, reeling from a combination of falling traffic, bad decisions and bigger-than-expected land expropriation costs. 

Up until recently, concessionaires, creditors and the government had maintained an uneasy truce, which saw many banks extending standstill agreements to concessionaires unable to refinance or service their debts anymore, in the hope that a lasting solution could be found. 

But despite their best efforts, the concessionaire of the AP41 toll road, connecting Madrid to Toledo, was unable to resist years of falling revenues and filed for bankruptcy earlier this month.

Needless to say, the AP41 has now set a precedent that may potentially be followed by all the other troubled road concessionaires and their creditors. It’s instructive to look at the problems besieging the Madrid-Toledo toll road because, despite the project’s idiosyncrasies, its ills are still representative of the larger problems affecting the sector.

At the heart of the AP41’s troubles are a series of questionable decisions taken by successive central and local governments that helped sink the road’s prospects. These a posteriori dictates included the cancelling of a stretch of the AP41 with good traffic potential and the opening, by the local Madrid government, of an alternative free route to the AP41. 

Add to that a land expropriation bill that virtually tripled from its original €55 million estimate and you have a recipe for disaster. The problem is that many other Spanish road concessions have been pushed to breaking point by similar lethal cocktails.

Spain’s transport ministry (Fomento) has said that it will unveil a package this month to help re-balance these troubled roads. Some of the announced measures include the use of €289 million from Fomento’s budget to extend loans to the concessionaires.

But the truth is no one knows if these measures will be enough to save these concessions. The only thing we know is that the AP41 has shattered the fragile balance between concessionaires, creditors and the government by declaring its inability to continue in business.

Precedent set, it’s anyone’s guess whether the AP41 bankruptcy will spell doom for the sector or make all the parties work together that much harder to come up with a solution, given that under Spanish law, it’s the government that will ultimately have to foot the bill.

Don’t be surprised if it turns out to be the spark that lights the fire.