Cantillon: Motorway deal a safety belt for bondholders

Almost six years on from the bank guarantee and the near-collapse of the Republic’s financial system, there is still debate over whether or not we should have burned the bondholders instead of placing the ultimate burden for the debacle on the taxpayers’ shoulders.

However, those who provided the credit that fuelled the Irish banks’ ill-fated lending boom are not the only ones who are enjoying the support of public money. At least some of the backers of the big infrastructure projects that were financed during the boom period appear to be indirectly benefiting from exchequer funds as well.

Last week it emerged that Direct Route (Limerick), which operates the tolled Limerick tunnel, had cash reserves totalling more than €24 million at the end of December.

The company received around €10 million in support from the National Roads Authority (NRA) in 2012 and 2013 to compensate it for the fact that fewer motorists than anticipated used the road, leaving Direct Route (Limerick) with lower than expected revenues and cashflows. That money ultimately came from State coffers.

The two things are not linked directly, but are the flip sides of the same coin. The operator’s contract with its senior lenders, including bondholders and the European Investment Bank, requires it to stockpile extra reserves because the cashflows that the toll road generates are short of a level set out in the loan agreement.

Some of those reserves are drawn from money that would otherwise be used to pay junior lenders and shareholders, but the NRA’s contribution partly compensates Direct Route for its poor cashflows and must add to the overall pool available to the lenders.

Also it gives some comfort to the lenders, a point made by Moody’s, which last week upgraded the company’s credit rating to Ba2 from Ba3 partly on the basis that the authority is providing it in the first place.

From the taxpayer’s point of view, the arrangement is a good deal less onerous than having to bail out the banks, and with traffic levels now on the up, it is possible that there will be no more need for NRA cash in the near future. Nevertheless, it’s yet another example of taxpayers underwriting the belt-and-braces protections given to bondholders.