Deutsche Bank Securities is in the market with a Portuguese future flow securitization that is believed to be a first of its kind. The 256.5 million deal is backed by the construction contracts on four major road projects in Portugal.
The fund participation units, to be issued by a special purpose entity called Eiffel 1, will have an average life of three years and a final maturity of five years. Standard & Poor's assigned a preliminary BBB-minus' rating last week.
"It's quite a unique structure," said Jerome Cretegny, an associate director with S&P's structured finance group in London.
For each of the road projects, there is a consortium of 10 construction companies. These companies are members of an ACE, short for Agrupamentos Complementares de Empresas. And it is the four ACEs that are the sellers in this transaction. S&P concentrated its analysis on the three largest members of the ACEs: Mota Engil SGPS, Bento Pedroso Construcaes, and Obras Pblicas e Cimento Armado. All three are non-investment grade.
But an important factor for the rating agency is that the companies are jointly obligated to complete the work. "So if any one member goes insolvent or disappears, the remaining companies would have an obligation to replace it." Cretegny said. "That's why the rating of the transaction can be higher than the rating of the construction companies."
Cretegny said the deal will be used to monetize future payments due under the construction contracts for four Portuguese highways: Beira Litoral e Alta, Costa da Prata, Grande Porto, and Auto Estrada do Norte. They are considered an essential part of the Portuguese National Road Plan and have strong support from the Republic of Portugal.
In S&P's view, the biggest risk in the deal is the possibility of a drawstop, which can be triggered by delays related to construction, environmental approvals or expropriations. "The banks, in certain instances, can stop paying advances on the projects," Cretegny said. "But our analysis indicates that the likelihood of that happening simultaneously on several projects is very low."
A high coverage ratio also adds comfort. "It's almost five times the debt service," Cretegny said. "So even if there is a delay on one project, there should be enough cash to continue making payments to the bondholders."
Cretegny said this is the first corporate securitization backed by construction contracts that S&P has seen. But now that the first one is underway, he believes there is potential for similar deals to come from other countries as well.
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