Project finance Dutch road cracks funding puzzle

The forthcoming N33 road project in the Netherlands will source 70 percent of its debt via an inflation-linked loan from Dutch pension provider APG. The ‘bank-to-pension’ funding solution is the first of its kind.

The N33 design, build, finance and maintain (DBFM) contract will require €125 million of financing to pay for the widening of a 38-kilometre portion of the road. The novelty is that Dutch pension provider APG will finance 70 percent of the debt used for the project (€77.8 million), the first time a Dutch pension is providing a direct loan for a Dutch infrastructure project.

The loan will be inflation-linked and will kick in once construction on the project finishes, refinancing a substantial portion of the commercial debt supplied by Bank of Tokyo-Mitsubishi, KfW-Ipex and Rabobank. An APG spokesman explained the loan will “pay a fixed coupon at face value lower than the interest charged by banks,” although he admitted that, once you add the inflation-protection element, then the loan cost becomes similar to bank debt.

However, there is still an important difference: “Bank loans offer a floating rate, requiring an interest swap to fix interest on the loan. That would cost the borrower around 25 basis points to 30 basis points a year – which the APG loan saves.”

Cost aside, the project’s most important achievement is that it successfully piloted a ‘bank-to-pension’ funding solution that might be used in future public-private partnership (PPP) projects.

From APG’s point of view, the appetite is certainly there. “We have a strategic allocation of 2 percent to 3 percent to alternative inflation, looking at inflation-linked debt. If you consider that we manage some €320 billion of assets, we still have quite some money to spend,” the spokesman added. But the €6.4 billion to €9.6 billion allocation will not be used solely for infrastructure loans – it will also target corporate loans to firms “whose income streams naturally provide an inflation link,” the spokesman explained.