The Greater Manchester Waste financing is one of the most complex to date for a UK PFI project, with two separate borrowers financing development over 30 sites, multiple treatment facilities and a waste-fired thermal power station.

Project sponsors John Laing, Viridor Waste Management and Ineos Chlor closed financing for the £640 million ($1 billion) project in April 2009. The deal had to work at the confluence of two serious difficulties – it had to overcome the complexities of a double SPV structure and a commercial bank market reluctant to handle complex credits.

The deal also stands out in that it featured the first loan from the UK Treasury Infrastructure Finance Unit (TIFU). The financing backs a 25-year waste and recycling contract, worth £3.8 billion over its term, and the construction of a WTE plant, to be handled by separate special purpose companies. The £582 million financing is split roughly 55/45 between the PFI SPV responsible for the waste management/MBT plant and the waste-to-energy (WTE) thermal power plant SPV.

TIFU provided a £120 million floating-rate loan to the project hedged by commercial banks, with the EIB providing loans of £100 million to the PFI borrower and £82 million to the WTE borrower. Commercial banks provided a total of £245 million in debt, consisting of £95 million from Bank of Ireland, £55 million each from BBVA and Lloyds and £40 million from SMBC.

The awarding authority, the Greater Manchester Waste Disposal Authority (GMWDA), contributed £68 million upfront and £35 million in debt to the PFI and WTE ventures. It will also use almost £125 million in PFI credits to help fulfil its obligations under the PFI contract, which covers the procession of 1.3 million tonnes of waste per year.

The senior term loans have a tenor of 23.5 years, with a partial cash sweep at year 10, which brings the average life down to around 15 years. Pricing starts at 325bp over Libor pre-construction and in operation starts at 335bp and ratchets through 335bp, 370bp and 395bp to year 16, when it hits 450bp – a margin thought to be the highest ever for a UK PFI. Upfront fees are 350bp and hedging fees are 40bp.

There is a six-month debt service reserve, ADSCR is 1.25x and minimum DSCR is 1.2x across both SPVs, although the banks' base case model is based on debt cover metrics of 1.3x-1.4x. The PFI SPV is geared to 86% and the WTE, 82%.

The big lender risks centre around the complexity of the double SPV structure and the acceptance of a mixture of technology risks (including MBT, AD, MRF, Composting and EfW). These risks are mitigated by conservative basecase modelling and the fact that the SPVs are fully cross-collateralised, so that if one of the project defaults cash is diverted from the other project.

For the first time in the UK waste PFI sector, banks also took risk on the exclusive offtake of electricity to an industrial user, the sponsor Ineos, which will use the electricity for its chloride plant at the same site in Runcorn, under a long-term PPA.

The proceeds from the PPA are included within the lenders' basecase. Under the offtake agreement, Ineos is purchasing the output at £30/MWh, which is indexed yearly. Essentially the PPA means banks are taking Ineos risk, rated CCC, although there is a well-structured provision within the project documentation that allows the output to be sold on the grid if problems arise with the offtaker.

The borrower for the waste management PFI contract is Viridor Laing (Greater Manchester), in which Viridor, a Pennon subsidiary, and John Laing each has a 50% stake. Viridor says its subordinated debt and equity obligations to this vehicle are £31 million.

Viridor has invested £19 million in equity in the WTE SPV, and together with sub-debt its economic interest in the project is 37.5%. John Laing also has a 37.5% interest and Ineos, 25%.

The WTE plant, located at Weston Point Runcorn, will handle 420,000 tonnes per year of refuse-derived fuel, produce 270GWh of power and 500,000 tonnes per year of steam. The GMWDA is providing 270,000 tonnes of the plant's RDF requirement, while Viridor will supply the rest. Keppel holds the £235 million engineering, procurement and construction contract for the WTE plant, while Costain holds a £397 million contract with the PFI borrower to build waste handling and treatment facilities.

The banks saw the double-SPV structure as being the most efficient for combining the financing for two projects in which shareholders had different interests. The birth of the structuring was based around GMWDA bundling the incinerator with the waste handling and composting project initially won by Viridor/Laing on advice from PartnershipsUK. PUK hoped to replicate the Cornish waste experience, and thought that joining the schemes would expedite construction. This may have been the case with common shareholders, but was not the case in this instance because Ineos has no significant experience or interest in waste handling PFIs, so the double SPV structure was pursued.

Greater Manchester Waste stands out in terms of its sheer size and complexity, but also because it was structured and successfully closed when simpler deals with lower debt requirements were being treated with caution.

Greater Manchester Waste
Status: Financial close 8 April 2009
Description: £582 million financing for a W2E plant and waste handling plant in Manchester
Sponsors: Viridor Waste Management; John Laing; Ineos Chlor
Mandated lead arrangers: Bank of Ireland; Lloyds; BBVA; SMBC
Non-commercial lenders: EIB; TIFU
Financial advisory: PricewaterhouseCoopers
Financial advisory (government): Ernst & Young
Sponsors' legal counsel: Pinsent Masons (Viridor/Laing); Ashurst (Ineos)
Lenders' legal counsel: Addleshaw Goddard
Procurer's legal counsel: Eversheds
EIB's legal counsel: Clifford Chance
IFU legal counsel: Linklaters
EPC: Keppel (WTE plant); Costain (handling and treating plant)
Technical adviser: Fichtner