Guangzhou-Shenzhen Superhighway

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In February 1988, Hopewell China Development (Superhighway) Ltd. signed a 30-year joint venture BTO contract with the Guangdong Provincial Highway Construction Company (a state owned enterprise under the supervision of the Guangdong Provincial bureau of communications) for the construction and operation of the Guangzhou-Shenzhen Superhighway (GS Superhighway), after 8 years of negotiation. It was the first expressway directly connecting Guangzhou with Shenzhen and Hong Kong. In structuring this deal, Hopewell China Development Co. and Guangdong Provincial Highway Construction Co. set up Guangzhou-Shenzhen-Zhuhai Superhighway Company Ltd. (GSZ East) as a 50/50 owned project company. Hopewell China Development was wholly owned by Guangzhou-Shenzhen Superhighway (Holdings) Ltd., a company that had interests in a number of other road concessions and was majority owned (97.5%)by Delta Roads Ltd. a 100% Cayman Island subsidiary of Hong Kong based Hopewell Holdings Ltd.. Hopewell Holdings Ltd. took responsibility for construction and toll collection, while the PRC partner retains ownership of the assets. The project reached financial closure in January1991 on funds of US$ 1,922 million - US$ 800 million as a loan from international banks, US$ 922 million in equity from Hopewell, and US$ 200 in equity from the government partner. In order to alleviate the looming debt problem, Guangzhou-Shenzhen Superhighway (Holdings) Ltd., issued in July 1997 US$ 600 million in bullet bonds (US$200 million maturing in 2004 and US$ 400 million maturing in 2007). These bonds were given a S&P BB rating due to several risks associated with the issue. These unsecured notes were subordinated to the US$ 800 million in debt to the GSZ East Company and were thus dependent on toll revenue for their repayment. Whereas the interest payments on these unsecured notes were backed by an irrevocable direct-pay letter of credit issued by the Hong Kong Shanghai Banking Corp. Ltd., this letter of credit expired in August 1999. This meant that the owners of the unsecured notes were now fully relying on Delta Roads Ltd. and Hopewell Holdings Ltd. for the payment of interest. By the end of June 1999, US$490 million of the original US$800 million syndicated bank loan was still outstanding. In addition to this “passed-on-loan” from Hopewell China Development, the GSZ East joint venture had an amount equal to US$ 680 million in shareholder loans outstanding with Delta Roads Ltd. and US$66 million in long-term obligations outstanding with a commercial bank located in the China. Further more, GSZ East had a loan of US$46 million loan with bank of China for amounts advanced to cover any shortfall in payments under the syndicated bank loan. The Bank of China, which replaced Guangdong International Trust & Investment Corp (GITIC) as the shortfall guarantor in January 2000, assumed GITIC’s creditor position and paid the US$46 million to GITIC on behalf of GSZ East. The company had finally also US$ 60.39 million (RMB 500 million) in loans outstanding. The BTO contract gave Hopewell 50% of profits in the first ten years, 48% for the next 10, and 45% for the final 10. The contract set no limit on toll rates. Toll rates were based on vehicle classifications and distance traveled and a portion of the tolls was collected in Hong Kong dollars. Construction of the 122.8km, dual 3-lane highway started in August 1988, which accommodated vehicles weighing 120 tons and allowed a cruising speed up to 120 kilometers per hour. The highway ran parallel to the Pearl River Delta and to the industrial area of Hong Kong. The Superhighway had been operational since 1994, but success was not as immediate as originally expected. The project encountered a number of setbacks linked with late completion (loss of early completion bonus of $129 million), significant cost overruns ($718 million) largely due to additional land acquisition costs for property development, and difficulties in achieving the expected initial revenue levels, the traffic levels were above expectations. The final total construction costs were US$2.3 billion compared to the US$1.9 billion originally estimated. None None