Financial Partnerships Unit

Senior Debt Funding in PPP’s

(Comparison Bank / Bond Financing)

BEN KING

Financial Partnerships Unit

Contents

Background Bank Funding Bonds Mechanics of Bond Finance Differences - Bank / Bond funding Reference Material

PPP Funding comprises Debt (c 90%) & Equity (c.10%) understand sources / uses of funds Key issues for public sector:

• Robustness / deliverability / strength• Cost of capital• Evidence of Competition

• Focus of presentation is senior debt

Bank Funding

Most popular Recognised process Robustness and deliverability key Final cost of funds reflects market rates

Bond Funding

Bond what is it how it works

Why use it? – potential cost saving Number of key parties

Bond Funded PPPs’ in Scotland Education

• North Lanarkshire (in progress) – circa £150m • Highland Schools (in progress) – circa £120m

• South Lanarkshire (in progress) – circa £250m Transport

• M6 DBFO - £125m• M77 / GSO - £152m

Water• Stirling - £109m

Health• Law Hospital - £136m

Fixed/ floating rate

bond

Index linked bond

Limited price index

(“LPI”)

Wrapped

Unwrapped

Public issue

Private placement

Types of Bonds

Senior debt finance – via a bond

Two main types: Index-linked Fixed

Different interest charges apply Market appetite / liquidity can vary

Bond Mechanics - Monoline insurance

What is it How it works Implications if not available

Lower financing costs

Issuers

Financial peace of mind

Investors

Bond Mechanics - Rating Agencies

Who are they / What are they What they do – there aim Different rating scale for different risk Monoline wrap key – higher rating = lower

fee Issues Rating Agency focuses on

Bond Mechanics - Issuing process

Bond arranger leads, supported by monoline Rating agencies review project Bond arranger sells to investors (Roadshow) Book-building process to get best price –

allocate issue to each investor. Bond launch Funds released / drawn at FC

Details Bank Bond (public issue)

Length of Debt & Maturities

•28-28.5 years on 30 year project•32 years on 35 year project

•33/34 years on 35 year project

Margins •100 / 90 basis points •fixed - 55 to 65 basis points•indexed linked – 80 – 95 basis points

Cover Ratios •LLCR 1.20 – 1.25•ADSCR 1.18 - 1.20

•LLCR 1.20 – 1.25•ADSCR 1.20 to 1.25

Mechanics •Staged draw downs, commitment fee on undrawn balance•Early repayment at par plus breakage costs

•Single drawdown, invested in GIC at close•Penalties for early repayment

Key Points •Longer tail required – thin market over 30 years•Incurs Cost of hedging (credit spread)•Syndication issue on bigger deals (£120m plus)•Greater addition debt raising and refinancing possibilities•Easier to sculpt payment profiles•Less documentation

•Cover ratio levels impacted by Rating Agencies requirements•Uncertainty of margin to close – depends on market appetite / liquidity•Due diligence work & costs tend to be higher, take longer•Less flexibility to raise addition funds•Less certainty at PB appointment•For credit enhancement, requires investment grade rating of project

Comparison – Bank vs Bond

Fixing of swap rate

agree underlying LIBOR rate

Swap pricing

Financial model finalised

Funds available at close

Bond issue underwritten at

agreed spread + gilt rate

Bond launched to market

Financial model finalised

Settlement period – funds

available 7 days later

Bank Bond

Differences at Close: Bank/Bond

Conclusions – Bank vs Bond Project specifics influence route Deals less than c. £120m, 30 year contract perhaps

BANK Market capacity issues - need proof of

deliverability / liquidity Evaluation / Consistency of Pricing is Key Bidders should offer flexibility / alternatives Watch for market developments and changes in

appetite

Comaprison of Cost – Bank vs Bond

Indicative Current Pricing Comparison

SWAPS BONDS

British Pound Swap Rate 5.20

+MLA cost 0.03

+Credit Premium 0.15

+ Margin 0.90

6.18%

Gilt Rate 4.60%

Spread 0.65%

Monoline Credit 0.35% Premium

5.90%

Interest Rate Cost Interest Rate

Cost

LUNCH