Financial Partnerships Unit Senior Debt Funding in PPP’s (Comparison Bank / Bond Financing) BEN KING Financial Partnerships Unit
Dec 27, 2015
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