What is your outlook on the health and performance of the infrastructure sector in Turkey?
The Turkish economy is built on strong foundations, with attractive demographics and a healthy banking sector. The infrastructure sector is the foundation of any economic development and with debut infrastructure projects like the Third Bosphorus Bridge, the Third Istanbul Airport and the Avrasya Tunnel that are currently under construction, and with a pipeline of numerous other infrastructure projects, we are of the opinion that the infrastructure sector is still very healthy. We expect the outlook for the sector to remain fairly robust over the next couple of years, with motorways, highways and of course the electricity sector being some of the main drivers. We believe that the main impetus for the government in the near future will be motorways, primarily because of how much economic activity they can unlock, and because there is a chronic need for road infrastructure in a few parts of the country, particularly in the east and south.
In terms of potential opportunities, there is talk of development of a new 2km long suspension bridge across the Dardanelles – which will be longer and cost more than the bridge we recently opened - and new motorways that will soon enter the bidding stages. Railways and metro projects are also on the radar, and Chinese, Japanese and Korean lenders are very interested in the bridge given the trade connections.
It has been over a year since your landmark financing deal for the Gebze-İzmir Motorway Project. What were the biggest challenges you encountered on the deal when it came to fundraising and bankability?
We had our financial close last year, our third such close where we were able to secure all of the funding to fully complete our project – a 400km Gebze-İzmir Motorway Project and the Osmangazi Suspension Bridge.
This year was all about the execution. We opened up the bridge to traffic and we also completed a 53km section of the 400km motorway project. Our deadline for the completion of the remainder of the project is the mid-2019, so of the 350km of the motorway that is still under construction; our plan is to finish another 45km by the end of this year - from Gebze to Bursa, and a 20km section in Izmir.
The biggest challenge associated with funding the project was the fact that we had a huge capex of between US$7bn and US$8bn that we needed to finance, with a very long construction period – seven years – as well; the total concession period is 22 years and four months. When we first started trying to finance the project, our initial approach was to attempt to fund it all in one go. But given the size of the potential transaction, it would have been very difficult to rely exclusively on Turkish lenders. As a result, we sought participation from a broad range of lenders including a group of Turkish banks, export credit agencies, and international multilateral and commercial banks – 21 institutions in all. Each institution had different priorities, and a big challenge at the outset was agreeing on a common framework. The market context at the time was fairly volatile: there was still the fallout from the Bear Sterns/ Lehman Brothers crisis, and the Greek economy was experiencing significant financial stress, so we weren’t able to successfully complete the deal on the first attempt. This led us to pullback, allowing us to include a more homogeneous lending group and phase the entire project according to segments of the overall infrastructure that was to be delivered, giving higher priority to segments that provided the most revenue, which would help support our equity and loan strategy.
Financing for Phase I of the project, from Gebze to Gemlik included the Osmangazi Suspension Bridge, and financing for Phase II A, from the Gemlik Intersection to Bursa, were completed in the first quarter of 2013 and in the second quarter of 2014, backed by a US$3.0bn funding package, which included US$1.4bn in equity and a US$2.0bn syndicated loan.
The process of refinancing this debt was to extend the maturity and secure required additional funding of US$3bn for Phase II B, from Bursa to İzmir, which began in 2014 and was completed in 2015. The funding required for the entire project came in the form of a refinanced loan of US$2bn for Phase I and Phase II A. Phase II B was secured with a new loan package worth US$4.956bn. As of the end of October 2016, approximately US$4.4bn has been spent on the project.
We had an interesting experience and great support from all of the institutions that participated. Turkish lenders were willing to lend, but pricing wasn’t particularly attractive. In fact, Deutsche Bank helped us in this regard – we managed to secure attractive terms from the bank, which we were able to bring back to local Turkish lenders in order to secure more aggressive pricing.
How have lending conditions changed in Turkey since you closed your deal?The feedback from lenders was that if there was a project that showed attractive cash flows and an equitable allocation of risk, then they would still be willing to lend, albeit more selectively. Foreign lenders were generally still interested, but cash flow guarantees were becoming increasingly important for them. They were looking for a backstop, and in some cases a government guarantee. We had a debt assumption agreement with the Turkish Treasury, which was instrumental in helping us secure significant amounts of interest from lenders, and I think other lenders are increasingly looking at deals that embed these kinds of terms.
The Turkish economy has been fairly resilient in the face of some challenges, including a sovereign downgrade. Will the downgrade have a material impact on Otoyol? How is the company hedging against this?
We haven’t felt any effects from the downgrade with respect to the project pipeline or the macroeconomic environment. That may change over time, and it’s not a guarantee for future performance. Our funding is in US dollars, and our revenue stream is also tied to the dollar. Every year we convert what we are going to charge users for our motorway from US dollars into Turkish lira at the beginning of the year, so any fluctuations during the year do have an impact. If the lira gains on the US dollar, we tend to see a positive impact. We are required to put into place exchange rate swaps for the periods where we pay off our interest costs and principle payments every 6 months. This means that every year we have to go back to the market and pick up these hedging instruments, which are seeing a rise in demand. Given the increased exchange rate volatility and the performance of the Turkish lira, it would be fair to expect Turkish project owners to boost their hedging activities – particularly as many of these projects have funding requirements tied to the US dollar.