FAQ on Loan Guarantees for Trans-European Transport Projects

January 14, 2008 // Published as a news service by IHS

What is the Loan Guarantee Instrument for Trans-European Transport Network projects?
LGTT is an innovative financial instrument set up to facilitate larger involvement by the private sector in the financing of the Trans-European Transport Network (TEN-T) infrastructure.

What are the objectives of the LGTT?
This new instrument will facilitate private sector involvement in the core European transport infrastructure, which often faces difficulties in attracting private-sector funding due to the relatively high levels of revenue risk in a project's early operating stages.

The LGTT, which is part of the TEN-T programme of the European Union (EU) and the EIB's Action for Growth initiative, will partially cover these risks and, thus, significantly improve the financial viability of a project. LGTT will be financed with a capital contribution of €1 billion (€500 million each from the EC and the EIB), which is intended to support up to €20 of senior loans.

The LGTT aims to facilitate investment in TEN-T projects by significantly improving the ability of the borrower to service senior debt during the initial operating period or "ramp-up" phase of the overall project, irrespective of initial traffic revenue. Its design will substantially enhance the credit quality of senior credit facilities, thereby encouraging a reduction of risk margins applied to senior loans to the project. These savings should surpass the cost to the borrower of the guarantee, resulting in a financial value-added for the project.

Which transportation projects can benefit from the LGTT?
Such projects include those with a common interest in the field of transport in the framework of decision number 1692/96/EC (the "TEN-T Project") that are compliant with European Community laws and for which financial viability is based, in whole or in part, on revenues, tolls or other user charges.

How much financing can the LGTT provide?
The stand-by liquidity facility guaranteed by the LGTT should not exceed 10% of the total amount of the senior debt (20% in duly justified cases, such as high-traffic volatility during the ramp-up period with strong indication of stabilised traffic and acceptable debt service capacity after the ramp-up). The amount of the guarantee is subject to a maximum ceiling of €200 million per project pursuant to the EIB Structured Finance Facility (SFF) rules. The SFF is the EIB's main facility for increased risk taking, established in order to support projects of European importance, including large-scale infrastructure schemes.

What risks does the EIB take under the LGTT scheme?
Under the LGTT, the EIB will accept exposure to higher financial risks than under its normal lending activities. In effect, if the EIB guarantee is called upon by the stand-by liquidity facility providers at the end of the availability period, then the EIB would reimburse the these providers and become a subordinated lender to the project but ahead of any payment to the equity providers and related financing.

Once the EIB has become a creditor to the project, amounts due under the LGTT will also rank junior to the debt service of the senior credit facility. The EIB, by taking such subordinated risk through the LGTT guarantee, will help the project to cope with the revenue risk of the early years of operation while relying on the long-term perspective of the project to be financially viable.

What do you mean by initial operating period or "ramp-up" phase of the project?
The aim of the LGTT is to improve the ability of the borrower to service senior debt during the initial operating period or ramp-up phase of the project, irrespective of initial traffic revenue. In other words, the LGTT together with the stand-by liquidity facility, will become effective and cover the period from the completion of the project -- for example, when the project is declared open to traffic in accordance with the concession agreement and/or the lenders' technical adviser has confirmed satisfaction of the completion tests, until the fifth anniversary of the completion date (or seven years, in special cases).

How can promoters apply for LGTT financing?
There are no formal requirements, such as application forms or deadlines, in order to apply for LGTT financing. The EIB should be contacted directly, either via its head offices in Luxemburg or via its European external offices.

How does the LGTT work?
The LGTT is an EIB guarantee, the risk capital for which is jointly provided by EIB and the EC, in favour of commercial banks that will provide the stand-by liquidity facility, in addition to the usual project finance funding instruments. The stand-by liquidity facility can be drawn by the project company in case of unexpected reduction of traffic income of the project during the initial ramp-up period of operation in order to assure service of its senior credit facilities.

The stand-by liquidity facility, funded by commercial banks, will benefit from a guarantee from the EIB and will be available for draw down in the initial ramp-up period only (availability period of up to seven years maximum) after construction of the project is completed.

All repayments to be made on the outstanding amounts of the stand-by liquidity facility (on a cash-sweep basis) are, in principle, subordinated to the senior loans underpinned by it, subject to specific needs of a given financial structure. If, at the end of the availability period, there are still amounts outstanding under the stand-by liquidity facility (such as interest, interest accrued and principal), the LGTT guarantee can be called upon by the stand-by liquidity facility providers, and the EIB would pay out the stand-by liquidity facility providers and then become the subordinated creditor to the project.

Once EIB is a creditor to the project, amounts due under the LGTT will still rank junior to the debt service of the senior credit facility and would be repaid either on a cash-sweep basis based on the cash available after senior debt service (the default solution) or on a fixed-reimbursement profile of the LGTT debt.

For more information, see the EU web site on the Trans-European Networks and the web site of the European Investment Bank.