Refi
on the Expressway
A case study by Ken Hawkes, consultant
with Lovells Lee & Lee, and Shinichi Yashiro
and Herbert Cheung of Project Finance
Division 1, Mizuho Corporate Bank Ltd.
The refinancing for Manila North Tollways
infrastructure financing, with few projects attracting
Corporation (MNTC) was completed with the simultaneous
investment and even fewer being financed internationally.
issue of Ps5.5bn in fixed-rate corporate notes and the
However, the Philippines economy continues to grow and
disbursement of US$32m in term loans on November 17
will place increasing demand on existing, and in many
2006. The proceeds of the combined issuance and
cases ageing, infrastructure, thereby increasing the need
drawdown of new debt facilities were utilised to prepay
for investment in new or rehabilitated infrastructure.
approximately US$134m in existing project debt. Most of the
lenders that had participated in the original financing for
MNTC elected to remain as lenders to the project on revised
terms to match the new debt facilities. The total debt
The North Luzon Expressway
MNTC holds the concession rights to toll the North
package issued or revised on financial close amounted to
Luzon Expressway (NLEX) in the Philippines. The NLEX is
US$210m.
one of the main arterial routes north of Manila and
comprises both open and closed toll-way systems
The joint lead managers for the peso denominated
operating over an overall road length of 84 km.
fixed-rate corporate notes (or FCXNs) were ING Bank NV
(ING) and BDO Capital & Investment Corp. (BDO). The
The open section of the toll road levies a flat toll
mandated lead arranger for the US dollar facilities was
fee for all vehicles passing through the toll booths,
Mizuho Corporate Bank. Both Mizuho and ING acted as joint
regardless of the length of journey. The closed section
refinancing co-ordinators.
levies a toll based on the length of a vehicle's journey
through several toll sections. The original road was built
The MNTC refinancing will be one of the few
over 30 years ago and with the rehabilitation and
infrastructure financings completed in the Philippines during
upgrading undertaken by MNTC, the NLEX now handles
2006. The Philippines remains a challenging market for
more than 140,000 vehicles per day.
Refi on the Expressway
MNTC's concession rights are based on a
owned by the government financial institutions. PNCC was the
Supplemental Toll Operation Agreement (or STOA) signed in
original toll concession holder for the NLEX, along with several
1998 under the Ramos era government with the Toll
other toll road projects, under a toll operating agreement with
Regulatory Board (or TRB). The STOA is essentially a
TRB. Subsequent joint venture arrangements among PNCC and
rehabilitate-operate-transfer concession with a term of 25
the NLEX's shareholders culminated in the granting of the
years from the commencement of tolling operations. The
STOA to MNTC as a privately financed infrastructure project.
NLEX will be transferred back to the Philippine Government
at the conclusion of the STOA period in 2030 at no cost to
the government.
Original project financing
The original project financing procured by MNTC for
The TRB was created by the Presidential Decree in
the rehabilitation and development of Phase 1 of the NLEX
1977 to attract private sector investment in government
relied heavily on multilateral and export credit agency direct
infrastructure projects. This decree authorised the collection
loan or guarantee support. The project financing signed in July
of toll fees for the use of certain public improvements that
of 2001 combined US dollar-denominated term loans from the
would allow a reasonable rate of return on private sector
Asian Development Bank (including a direct loan facility and a
investment in infrastructure.
complementary or B loan facility), the International Finance
Corporation, Australia's Export Finance and Insurance
Notwithstanding the legal framework in relation to
Corporation, debt facilities covered by Compagnie Francaise
the presidential decree, to date the NLEX remains one of the
d'Assurance pour le Commerce Exterieur (COFACE) and the
few successfully financed toll road project in the Philippines,
Multilateral Investment Guarantee Agency (MIGA), and
and in Asia.
fronting provided by the Swedish Export Credit Agency ( SEK).
MNTC is a Philippine corporation that is majority
The cumbersome debt package was indicative of the
owned by First Philippine Infrastructure Development
difficult times in which the original financing was documented.
Corporation (part of the Lopez Group in the Philippines).
During the negotiations of the original project financing, the
MNTC's shares are also held by Leighton Asia (part of the
original NLEX sponsor, Benpres Holdings Corporation (a
Leighton Holdings group of Australia), Egis Projects (a
member of the Lopez Group), was forced to enter into a debt
member of Groupe Egis of France) and the Philippine
restructuring arrangement and First Philippine Holdings
National Corporation (PNCC). PNCC is one of the better
Corporation (another member of the Lopez Group) had to
known Philippine construction companies and is majority
replace Benpres Holdings Corporation as the main sponsor.
Refi on the Expressway
The Philippine Government also had difficulty in
Strong cashflows and robust traffic volumes also
appropriating the funds required for land acquisitions. As
demonstrated a viable credit for a local currency note
a result, the original project financing closed in February
issuance and justified a more streamlined covenant package
2003, some 19 months after the signing date. The loans
for all debt holders.
disbursed to fund construction works for the NLEX
amounted to approximately US$253m. Total project costs
amounted to more than US$370m.
From a loan administration, perspective, the
cumbersome covenant package meant that both the
borrower and its lenders were burdened with numerous
The main construction contractor for Phase 1 of
approval and consent requests during and after the
the works required by the STOA was Leighton Contractors
construction phase of the project. This led to delays in
of Australia, with Egis Projects providing sub-contract
obtaining many approvals and consent, which in turn made it
support for the toll, telecommunications and traffic
difficult for MNTC to efficiently manage the project.
management systems. After a construction period of two
years, the major upgrade and rehabilitation works were
Given these factors, the lenders recognized the
completed with the issue of the Toll Operation Permit by
merits of MNTC issuing peso-denominated notes to partly
the TRB for Phase 1 of the NLEX rehabilitation and
refinance the original project debt. However, the challenge
expansion effective February 8, 2005.
was how to unwind the burdensome covenant package,
which was set by the original lenders in what was, at the
time, a lender's market.
The case for refinancing
The STOA provides a toll formula under which
MNTC may charge users of the NLEX. MNTC levies tolls
MNTC started the refinancing process in April 2006,
culminating in the signing of all refinancing documents on
November 8 2006 in Manila.
on vehicles using the NLEX in pesos. The toll is
Financial closing occurred soon after, once the
periodically reviewed and allows MNTC to adjust the toll
required central bank approvals were obtained and funds
rates based on various indices. One of the factors that
were drawn under the new debt facilities. Most of the lenders
MNTC is permitted to take into account is movements in
from the original project financing elected to remain in the
exchange rates for debt service obligations, recognising
deal, demonstrating the strength of the credit offered by
that the main source of funding for the NLEX is US dollar
MNTC.
loans. Although such indexation is 100% for the first two
years of commercial operation, it will be reduced to 50%
of applicable debt service obligations from 2007. With all
of MNTC's indebtedness being US dollar loans prior to
refinancing, MNTC would be (without additional hedging)
exposed to 50% of adverse movements in US dollar to
peso exchange rates.
With the first toll review becoming effective in
2007 and a strengthening peso, MNTC had good
commercial reasons to refinance its original project debt
in order to reduce its currency risk exposure.
Refi on the Expressway
The FXCNs
The issue of the peso-denominated fixed-rate
To facilitate the closing, MNTC entered into a
bridging facility whereby the proceeds of the FXCNs were
corporate notes (FXCNs) was a private placement to qualified
held in pesos, pending conversion into US dollars in
institutional lenders under the Philippine Securities
accordance with Bangko Sentral Ng Pilipinas (or BSP)
Regulation Code. MNTC's offering of the FXCNs was well
guidelines and approvals.
received, with in excess of Ps7bn being received in
commitments from the Philippine financial markets for the
The lender under the conversion bridge facility
base offering of Ps3bn. The FXCNs were issued with the
advanced the US dollar equivalent of the escrowed peso
highest rating of Aaa by the Philippine Ratings Services
proceeds to a closing payment agent under an
Corporation for a total amount of Ps5.5bn.
arrangement whereby all funds to be utilised for
prepayment were to be pooled and, once all conditions
The FXCNs were issued at a fixed coupon of 9.75%
required for the refinancing were met, the funds would be
per annum, maturing seven years after the issue date. On
simultaneously advanced to the lenders way of
financial close, the holders of the FXCNs were granted a pari
prepayment. After the refinancing occurred, the peso
passu right in the security package held by the lenders to
proceeds from the FXCN issuance are to be converted into
MNTC. Although the FXCNs and the remaining US dollar debt
US dollars as permitted by the BSP (and at the prevailing
are pari passu in terms of priority and were aligned in terms
market rates) and then applied in repayment of the
of the covenant package, the amortisation of the respective
conversion bridge loan.
peso and US dollar debt differs. The FXCNs are to be repaid
in a tail heavy (or almost balloon) payment on maturity,
while the US dollar indebtedness maintained its original
amortisation and maturity.
Alignment of terms for the refinancing
The premise for the refinancing was to agree a set
of common terms and conditions with lenders willing to
refinance all of the original US dollar project debt. These
The conversion bridge facility
Whilst the FXCNs were issued to refinance existing
common terms and conditions could then be offered to the
existing lenders on the basis of continued but reduced
US dollar indebtedness of MNTC, one of the other features of
participation on revised terms to ensure that all parties
the refinancing was the use of a US$96m conversion bridge
providing or maintaining credit were on an equal footing to
facility to allow the simultaneous issuance of peso-
the maximum extent possible.
denominated debt in the Philippines and the repayment of
current US dollar denominated debt.
The use of a conversion bridge facility was necessary
However, the NLEX is the first toll road in the
Philippines to form the basis of an issue of pesodenominated corporate notes. The existing lenders to the
as the conversion of Philippine pesos to foreign currency for
NLEX had also established a sophisticated foreign law-
the purpose of prepaying an outstanding foreign currency
governed documentary framework that was to form the
loan within the Philippine banking sector remains a regulated
basis of the refinancing. Negotiating and documenting the
activity. MNTC could not simply convert the proceeds of the
refinancing was a difficult task given the starting point of
FXCN issuance to US dollars to effect the prepayment of part
reference for the two main groups of lenders (the peso
of its dollar debt.
FXCN noteholders and the US dollar term loan lenders) was
Refi on the Expressway
fundamentally different although not opposed. The joint
lead managers for the FXCN issue in conjunction with the
mandated lead arranger negotiated the terms of the
refinancing over a three-month period culminating with an
information memorandum (for the FXCNs) and an offer to
accept revised terms (for the US dollar debt) being issued
by MNTC.
A more or less complete set of covenants was
Financial close
The refinancing was successfully closed in midNovember 2006 with continued support from the existing
project finance lenders, which have previously benefited from
a very lender biased financing package. The lenders accepted
the relaxed refinancing terms based on the strong cashflow
and long-term viability of the project, which had already been
demonstrated after just one year of operation.
then offered to the existing lenders, with the added
incentive that the margins agreed on the original financing
would be maintained. The existing lenders could then
evaluate the proposed amendments to the financing terms
and conditions and tender their debt on revised terms, if
accepted.
Expansion of the NLEX
The STOA sets out three phases of development
for the NLEX. Phase 1 was completed in 2005 and
financed with the original project financing. MNTC expects
to benefit from planned developments in north Luzon,
such as expansion of commercial activities in the Clark and
Subic Special Economic Zones.
These additional developments are expected to
contribute further traffic volumes into the NLEX. In the
near term, MNTC intends to implement certain segments
of Phase 2 and Phase 3 in the longer term to take
While the financial model showed robust projected
figures, the main key to success of the refinancing was the
ability of the lenders to understand the needs of their
customer and the risks involved. The joint refinancing coordinators as well as BDO played key roles in working out a
structure that could address the interests and concerns of the
borrower, the domestic noteholders and the international
lenders.
Future growth in infrastructure
With the success of the MNTC refinancing, it is
expected that more Philippine projects financed by foreign
currency debt will take advantage of the local currency capital
markets to reduce their currency exposure. Currently, the
longest duration of instruments that local financial institutions
are willing to buy is 7 years. It is hoped when the local
markets become more mature and liquid, longer-dated
instruments will become available.
advantage of the regional developments and growth in
traffic volumes in and around the NLEX.
* Reprinted with permission from PFIE