The biggest Australian PPP to date, the A$3.7 billion ($3.34 billion) project financing for AquaSure's A$4.5 billion Victoria desalination project is a two tranche story. The first was expected to be swallowed whole in senior syndication and the second is a test of how far appetite goes for such a sizeable deal in a recovering lending climate.

As predicted, the first A$2 billion tranche was taken by a club of 12 banks. The second A$1.7 billion tranche, provided by joint mandated lead arrangers and bookrunners National Australia Bank (NAB) and Westpac, started syndication at the end of September and is backed by a guarantee of syndication success from the Victorian government, which will make up any shortfall in commitments.

The strategy is a simple but effective way of minimising state debt on a deal that could not raise fully underwritten bids at the time of tender. A more rigid approach might have seen the deal fail to gain traction with lenders, or the state take the full second tranche debt. In short, syndication of any of the A$1.7 billion tranche is better than none and success appears likely, given fees for the largest participations are 240bp.

Requests for proposals went out in September 2008, and the Victorian government shortlisted two groups – Aquasure (Ondeo Degremont, Suez Environment, Macquarie and Thiess, with Macquarie Capital as adviser) and BassWater (Veolia Water, John Holland and ABN Amro Australia). Both consortiums were asked to submit revised, best-efforts bids in light of the trouble in the financial markets, but with full documentation. The lack of banks willing to underwrite bids prompted the best-efforts revisions and brought the Victorian government in as lender of last resort.

Aquasure won in July and came into the deal with equity commitments from UniSuper, a Victoria-based superannuation fund, HSBC Environmental Infrastructure Fund, Itochu and Samsung C&T, the last of which raised co-investments from the Korean Development Bank, Korea Life Insurance and Korean Teachers Credit Union.

The A$2 billion tranche is seven-year senior debt with margins of 350bp over BBSW for the first five years, 375bp at year six and 400bp at year seven. NAB, Westpac, BBVA, Banco Santander, Bank of Tokyo-Mitsubishi, SMBC, Intesa Sanpaolo, Dexia, HSBC, ICBC, Macquarie Bank and Mizuho all took tickets of between A$100 million and A$250 million. The debt to equity ratio was 80:20, the average debt service coverage ratio was 1.35x, and the loan life coverage ratio was 1.38x.

The A$1.7 billion tranche has the same margin and tenor as the larger tranche and is not being presented as a separate syndication but as an opportunity to participate in the entire project debt of A$3.7 billion, with buyers joining on a pari passu basis with the 12 lenders on the A$2 billion of senior debt.

Bookrunners NAB and Westpac started the sell-down on a soft basis to losing consortium BassWater's banks – ANZ, Bank of Ireland, Banco Espirito Santo, BNP Paribas, Calyon, CIC, ING, RBS and WestLB. This was followed by a roadshow, starting on 21 September in Sydney, moving on to Singapore and Hong Kong and ending in London on 30 September. Early-bird commitments are due in by 16 October, and NAB and Westpac expect the deal to be closed by mid-December.

Lenders can take a A$200 million or above ticket for fees of 240bp; a A$150 million to A$200 million ticket for 220bp; A$100 million to A$150 million ticket for 200bp; A$75 million to A$100 million ticket for 175bp; A$50 million to A$75 million ticket for 150bp; or a A$35 million to A$50 million ticket for 125bp.

The deal is the first PPP financing for a desalination plant in Australia. The 30-year design-build-finance-operate (DBFO) concession involves building a 150 billion litres per year reverse osmosis plant (with the possibility of future expansion to 200 billion) in the Wonthaggi region, south-east of Melbourne.

The project comes with some construction risk but is still considered a good lending prospect. Reverse osmosis technology is well known and runs successfully in many major desal projects. However, the project will require frequent changing of its filtration membranes and use significant amounts of power – 90MW in total – from the Victorian energy grid, which will be offset through the purchase of renewable energy credits by Aquasure from AGL.

Construction is set to take three years, and the plant is expected to be operational by 2012. The construction contractor and operations contractor are both joint ventures of Thiess and Degremont. The project also involves building an 86km transfer pipeline to connect to Melbourne's existing water network and underground power cables co-located with the pipeline.
The renewable energy offset has spawned a further project – the 63MW Oaklands Hill wind farm, which is being built by AGL under a 27-year contract. Construction of Oaklands Hill will begin in October and cost around A$200 million. AGL is still debating whether to project finance the farm or fund from existing cash flow.

Aquasure
Status: Financial close 2 September 2009
Description: 30-year design-build-finance-operate PPP contract to build a 150 billion litres per year reverse osmosis plant
Sponsor: Aquasure (Ondeo Degremont, Suez Environment, Macquarie and Thiess)
Mandated lead arrangers: NAB, Westpac, BBVA, Banco Santander, Bank of Tokyo-Mitsubishi, SMBC, Intesa Sanpaolo, Dexia, HSBC, ICBC, Macquarie Bank and Mizuho
Financial adviser to the government: PwC
Financial adviser to Aquasure: Macquarie Capital
Legal adviser to Aquasure: Clayton Utz
Legal adviser to lenders: Mallesons Stephen Jaques
Legal adviser to the governement: Corrs Chambers Westgarth
Technical adviser to the government: GHD/Maunsell