Directory of Innovative Financing: Hungary

Hungary

Project Title: M1/M15 Motorways

Project Title: M5 Motorway

Project Title: Monor Local Telephone Operating Concession

Project Title: Matav Commercial Loan Syndication

Project Title: M1/M15 Motorways

Country: Hungary

Project Costs: $340 million

Sector: Transport

Status: Deal was closed in December of 1993. The Ministry of Transport issued a construction permit in January and work was begun. The M1 section should be completed by the end of 1995, while the M15 is scheduled to open by December 1997

Sponsors/Adviser: The Hungarian Bureau for Motorways awarded the concession with Morgan Grenfell & Co. and the New York law firm Stroock & Stroock & Lavan as advisers.

Concessionaire: 35-year concession held by the Hungarian Euro- Expressway Consortium (HEEC) led by Transroute International of France as operator, with nine other equity partners plus the European Bank for Reconstruction and Development. Financial institutions Banque Nationale de Paris (BNP) and Caisse des Depots et Consignations of France and OTP Bank and Kereskedelmi Bank (OKHB) of Hungary were made full members of the bidding consortium in order to develop creative financing solutions. They provided both debt and equity.

Customers: Motorists on this route improving connections between Budapest, Bratislava and Vienna, which is expected to increase the volume of annual traffic by up to 8%. It is anticipated that after a 2-3 year transition period up to 70% of traffic in this corridor will choose to use this route, finding the tolls (initially set at 350 Hungarian forints/US$3.50 per car/HUF 1,400/US$14 per truck) reasonably priced given the improvement in road quality.

Financing Package: The concession required a 80/20 debt-equity ratio, and went to HEEC on a fully non-recourse BOT basis with no government guarantees, and terms ensuring that 40% of the debt portion would be from local institutions.

The EBRD led the syndications for two tranches of 15-year commercial loans priced at 300 bp over Libor initially, dropping to 250 bp in the first five years after construction and 200 bp thereafter. The first tranche was for Ecu48 million ($62.0 million) and the second for Ecu137 million ($176.9 million).

The local debt came in three tranches, all with refinancing guarantees to create maturities of 15 years: a) an OKHB loan for HUF 3,000 billion; b) a serial bond for issue for HUF 3 billion underwritten by OTP and OKHB; c) two EBRD bond issues for a total of HUF 3 billion by the EBRD in the Hungarian market.

Innovation: This is the first major private infrastructure project to be financed in Central or Eastern Europe. As such it required a strong role by a AAA-rated multilateral institution such as the EBRD, since the low level of imports required took away the possibility of much debt financing from bilateral export credit agencies. But given the need for hard currency financing, it was agreed that some toll revenues could be accepted in hard currency. The majority of the exchange rate risk was mitigated by obtaining about half of the debt financing locally.

The bidding process also required the potential concessionaires to supply their own traffic and revenue forecasts before setting their tariffs. The concessionaire is free to change the tolls within agreed limits based on inflation and exchange rates. In the case of economic difficulties, the government may negotiate remedies within the original limits of the project's financial plan, such as exceptional toll increases, concession fee decreases, dividend deferrals, and extension of the concession period, but will not extend new financial support.

Brief: With 58 km of new roads in important high-traffic areas, the M1-M15 project serves as a vital link between Eastern and Western Europe. The government was determined from the outset to limit its involvement, and designed the project from the outset as a concession that would be driven by financial institutions with a vision for long term benefits rather than immediate gains for construction companies. The ability to raise international commercial project financing was a crucial issue in awarding the concession, with almost all the commercial risk placed upon the operator.

Project Title: M5 Motorway

Country: Hungary

Project Costs: Ecu344 million ($444.1 million)

Sector: Transport

Status: Financing projected to close in October or November, 1995

Sponsors/Adviser: Hungarian Bureau for Motorways.

Concessionaire: 35-year concession held by Alfold-Koncesszios Autoplaya Rt (AFA), a consortium led by the Bouygues Group of France and Bau Holding Group of Austria with Intertoll Group of South Africa as operator and Commerzbank as arranger; Stroock & Stroock & Levan is providing legal advice to the government.

Customers: Motorists on this route improving connections between Budapest and Kecskemet, an important link between Hungary, Serbia and on to Greece and Turkey.

Financing Package: The concession required a 80/20 debt-equity ratio, and went to AKA on a fully non-recourse BOT basis with no government guarantees, and terms ensuring that much of the debt portion be obtained from local institutions.

The EBRD approved a Ecu139.5 million ($180.1 million) package of loans and guarantees for AKA in July, 1995. It will also be syndicating a Ecu 200.7 million ($259.1 million) 13.5-year commercial B loan internationally. It also is providing HUF12 million that may be raised in a local bond issue, guaranteeing Ecu4 million ($5.2 million) of a locally raised HUF 12 million loan, extending an Ecu17 million ($22.0 million) subordinated loan, and guaranteeing refinancing of the Ecu96 million ($123.9 million) balloon payment under the Ecu200.7 million B loan at the end of the loan life.

Innovation: Despite this year's worsening Hungarian macroeconomic climate that is causing delays of several months in the closure date, the package for this project is proving to be quite resilient and is now expected to close by the end of the year.

The EBRD has taken some of the same mechanisms it used in the earlier M1/M15 package and adapted them to a revenue stream that, unlike the one in that project, will contain no hard currency toll collections. The government is giving the concessionaires 60km of existing road, allowing some sections to start producing revenue with six months of opening. The government is also providing contingency support in the form of a certain fallback operating subsidy if the project does not cover loan obligations, which gives the lenders a form of guarantees against worst-case traffic usage scenarios. The subsidy will reportedly cover potential revenue gaps of 25% in the first 6.5 years of operations.

Brief: This road concession is considered riskier than the M1/M15 in that all toll revenues will be collected in local currency.

Consequently a larger portion of the debt financing is expected to be raised locally. Two other concessions are also being actively pursued: the $700 million M7 motorway from Budapest tothe Lake Balaton resort area, and the M3 running east from Budapest, whose mileage and project costs have not been set.

Project Title: Monor Local Telephone Operating Concession

Country: Hungary

Issue Amount: $60 million

Sector: Telecommunications

Status: Closed in February, 1995; initial phase completed, due to be fully operational by end of 1997

Sponsors: Hungarian Ministry of Water, Transport and Telecommunications.

Concessionaire: A 25-year concession held by Monor Telefon Tarasag (MTT), a special purpose corporation led by a specialized US telecom consortium (74.25%) and private Hungarian investorsfrom the 40 municipalities in the concession area (25.75%).

Purchaser: 80,000 potential business and residential users in the project area near the Budapest airport.

Financing Package: $30 million in sponsor equity, $30 million in 10-year securitized OPIC debt.

Innovation: This remains the only one of the 15 local telephone operators (LTO) concessions Hungary awarded in May, 1994 to close. Others remain bogged down in negotiation despite the involvement of multilaterals like the IFC and EBRD.

Although this limited recourse project was considered to have much construction risk to draw for commercial bank participation, quasi-governmental OPIC was willing to lend long- term after obtaining an unusually high equity participation from the sponsors and the following securitization terms: a) all the US sponsors' shares of MTT were pledged as assets and the right to find another operator if they do not meet pre-identified chronological buildout targets; b) a lien on all MTT assets; c) a pledge on all MTT's Hungarian bank accounts; d) indexing MTT tariffs to keep up with inflation; e) an escrow account covering six months of dollar payments in the event that the central bank has insufficient foreign exchange to cover the sponsors' hard-currency debt obligations.

Brief: In May of 1994 Hungary opened its telecommunications sector to competition by awarding 15 concessions for LTOs in areas not covered by the national carrier Matav. Each bidder had to have 25% local sponsorship, be able to increase the number of installed land lines by 15.5% a year for six years, and bring its own financing for the $60 million in investment requirements estimated for each concession. The concessionaires were granted eight-year exclusivity in operating rights to their regions.

MTT's US sponsors included United International Holdings, Hunter Systems Inc., Denver and Ephrata Telephone and Telegraph, and Consolidated Companies.

The strong commercial potential of providing cable television and other value-added services over the project's newly installed fiber optic lines made the sponsors comfortable with the high equity commitment OPIC required before stepping in to fill the place of commercial banks. The sponsors' willingness to accept the unprecedented securitization package also left the Washington agency comfortable with being the sole lender, and today the project is under construction and likely to be the first of Hungary's LTO concessions to become fully operational.

Other foreign sponsors that have pooled multiple Hungarian LTO concessions into larger projects and worked with multilateral agencies such as the IFC and EBRD have not been able to close as rapidly, even though the government reduced the local shareholding requirement from 25% to 15% or less as a way to help speed up the transactions when local money proved much harder to find than anticipated. Difficulty in finding terms for securitizing those concessions in a way acceptable to commercial lenders who would come in under IFC or EBRD B loan umbrellas has reportedly contributed to the delays in those deals, as have sponsors' painstaking negotiating processes.

Project Title: Matav Commercial Loan Syndication

Country: Hungary

Cost: $300 million

Sector: Telecommunications

Status: Signed September, 1995

Sponsors/Lead Manager: Hungarian Telecommunications Co. (Matav),with EBRD, IFC and Deutsche Bank as co-arrangers.

Participants: Lending syndicate included 5 underwriting lead managers (Credit Suisse, Deutsche Bank Luxembourg, JP Morgan Securities, NatWest Markets and Sumitomo Bank) plus 14 lead managers, six managers, and 10 co-managers.

Financing Package: $300 million unsecured multicurrency loan split into three tranches: a) $50 million each from the EBRD and IFC at ten-year maturities and five years grace, plus two $50 million eight-year B loan syndications with six years grace at 160 bp over LIBOR arranged by EBRD and IFC; c) $100 million in a five-year parallel C loan commercial financing at spreads of 150 bp over LIBOR and a bullet repayment.

Innovation: This deal is seen as another important step in the ongoing privatization of Matav - one of the largest privatization transactions to date in Central and Eastern Europe.

The package filled the financing gap in the privatized national carrier's $1 billion 1995-96 investment program, with the involvement of the EBRD and IFC crucial to extending maturities to longer tenors than would have been possible in the markets. With Matav under management control since 1993 by a strategic investors group of Deutsche Telecom-Ameritech-EBRD-IFC, commercial banks reportedly would have been willing to lend it $300 million, but only in the form of shorter-term credits. The commercial banks were asked to commit resources proportionally to both the B and C syndicated loan tranches. The loan had no political risk insurance.

Matav stood as guarantor of the package, which was in the name of its financing arm, Investel. To line up the package it reportedly paid the following fees: for the IFC B loan syndication, 90 bp to commercial banks offering $12 million, 75 bp to those offering $9 million, and 60 bp to those offering 6 million; in the commercial parallel financing, 55 bp to those who participated at $12 million and 30 bp to those who lent $6 million.

Brief: This financing rounds out the $1 billion Matav needs for a near-term modernization package that consists of adding 619,000 new lines and upgrade 200,000 existing ones. Previous portions had been financed through $400 million of internal cash generation and $300 million from existing loans.

The multilaterals had also assisted the early-stage privatization of Matav, providing $56 million (EBRD) and $28.6 million in respective equity before the government sold a 30.3% strategic stake that carried management control to the Deutsche Telecom-Ameritech team for $875 million. Those investments helped the company begin its development program without having to incur more debt before privatization. The strategic investors must meet service increase targets of 15.5% a year, and have pledged total investment of $4.2 billion by 2002.

The government still holds 65% of the company, but is expected to reduce that to 25% after an upcoming second-stage sale that could involve private placements and an initial public offering on the Budapest Stock Exchange that could generate several hundred million more dollars of fresh capital.

Infrastructure and Financial Markets Division
Private Enterprise and Financial Markets Subdepartment
Sustainable Development Department
Inter-American Development Bank

Last updated: 02/26/07