 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

 DetailsBankBond (public issue) Length of Debt & Maturities years on 30 year project 32 years on 35 year project 33/34 years on 35 year project Margins100 / 90 basis pointsfixed - 55 to 65 basis points indexed linked – 80 – 95 basis points Cover RatiosLLCR 1.20 – 1.25 ADSCR LLCR 1.20 – 1.25 ADSCR 1.20 to 1.25 MechanicsStaged 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 PointsLonger 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 BankBond 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 SWAPSBONDS British Pound Swap Rate MLA cost Credit Premium Margin % Gilt Rate 4.60% Spread 0.65% Monoline Credit 0.35% Premium 5.90% Interest Rate Cost

 LUNCH