The preferred bidder for the $2.2 billion phase one of the M10 Moscow-St Petersburg motorway, the Vinci and N-Trans North West consortium, will enter negotiations with banks and the Russian national highway authority in Moscow next week (10 November) to discuss changes to the financing terms and possibly concession structure.

Although no formal material adverse change (MAC) clause will be made (the group of 12 banks had only sought first-stage credit approval) all parties to the deal accept that the financing terms will need to be revised due to a MAC resulting from market turbulence.

The Vinci-N-Trans consortium, advised by SG, received pre-commitments from 12 banks prior to the collapse of Lehman and final bids were entered on 15 September, the day the Russian financial system went into meltdown and a handful of banks defaulted on margin payments and bond obligations. The Vinci bid beat competition from an Alpine-FCC-Brisa consortium advised by Gazprombank.

Talks in Moscow will begin next week focusing on technical, legal and financial aspects of the 30-year real toll concession. Twelve commercial banks preliminarily agreed to debt margins of between 175bp to 225bp but these could increase upwards of 150bp, and one source suggested margins could double. All banks, so far unnamed, which pre-committed are continuing to support the deal apart from Dexia and Depfa who have dropped out to due their own balance sheet concerns' leaving a club of ten banks.

A bid bond posted by the sponsors as collateral should be safe because the documentation featured a carve out if a bank MAC was triggered.

According to the timetable the preferred bidder has 180 days from award (1 November) until it must formally agree the concession and reach financial close, with the possibility of a further 60 day extension. According to a source close to the deal a compromise is likely given the political impetus behind the project.

Half of the project's capital expenditure is likely to be met with state subsidies, and most of the remainder would be met from development finance institutions such as the EBRD, EIB, IFC and the Russian development bank, VEB.

A commercial bank tranche will, nevertheless, still be required probably as a club under an IFC B loan facility of $400-500 million or with political risk insurance from an export credit agency. Such are market conditions at the moment even development institutions will struggle for rouble liquidity, given that the rouble cross-currency market is effectively closed.

The four largest banks Sberbank, VTB, Gazprombank and Bank of Moscow are relatively liquid after state intervention and other pools of liquidity could be tapped such as the Eurasian Development Bank and Black Sea Trade Development Bank.

In terms of changing the concession structure, it is unlikely that traffic risk will be shifted from the private parties, as the traffic models were fairly conservative: congestion is frequent along the highway's route connecting the main airport in the Russian capital, Sheremetyevo, to a busy north-western consumer belt. The wealth of local residents in Moscow is comparable to the per capita income of Poland, and the tolls on the M1 phase 1 are priced below the tolls in Poland.

If the procuring authority accepted currency risk this would greatly assist commercial liquidity. And there is precedent for this: the grantor has accepted currency risk for the Western Diameter concession.

Aside from currency risk all transport PPPs in Russia must also overcome the thorny issue of design risk. Although bidders compete against an outline design provided by the procurer, the detailed design of the winning bidder must be approved by the State design expert, which can take around 14 months. Who bears the design risk, and when best to schedule financial close are still unclear. It is possible that commercial close and financial close will be months apart, and it may be too inefficient to have design approval as a condition precedent of drawdown given hedging costs. It is in everyone's interest to minimise the time between commercial and financial close.

The entire Moscow-St Petersburg motorway will be around 600km long. Phase 1 of the M10 is 43km long and will have 10 lanes, five bridges and six viaducts. Construction is scheduled take three years. (Search Moscow-St Petersburg for more).

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