Arguably only surpassed by the intricacy of the London underground PPP contracts, the Manchester Waste project debt package is one of the most complex ever for a PFI project - with two separate borrowers financing development over 30 sites, multiple treatment facilities and a waste fired thermal power station.

Viridor Waste Management, John Laing and private chemicals firm Ineos Chlor closed financing for the £640 million ($968 million) project on 8 April. The deal had to overcome the complexities of a double SPV structure – which in hindsight is unlikely to be repeated – and a commercial bank market reluctant to process complex credits.

The financing is also notable in featuring the first loan from the UK Treasury's Infrastructure Finance Unit (IFU), which has been used to replace shortfalls in commercial debt funding. The financing backs a 25-year waste and recycling contract, worth £3.8 billion over its term, and the construction of a waste-to-energy (WTE) plant, to be handled by separate special purpose companies.

Waste projects, particularly incinerators, are always politically sensitive, but the Manchester project makes economic sense – the contract increases the cost to Greater Manchester householders by £1 per week, compared with the £2 cost of a "do nothing, build nothing" approach accrued by Landfill Tax and penalties. The Greater Manchester Waste Disposal Authority (GMWDA) and the nine District Councils are aiming to build on their recycling progress, from 7% of Greater Manchester's municipal waste in 2002/03 to over 30% in early 2009.

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 £582 million financing is split roughly 55/45 between the PFI SPV responsible for the waste management/MBT plant and the waste to energy thermal power station SPV.

The Treasury's IFU contributed a £120 million floating-rate loan to the project hedged by commercial banks, while the EIB has provided 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. A £40 million portion of Bank of Ireland's commitment will be syndicated in the wider bank market.

The awarding authority, the GMWDA, is contributing £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 fulfill its obligations under the PFI contract. The contract 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, 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 and 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 stand out lender risks centre around the complexity of the double SPV structure and the acceptance of a mixture of technology risks. These risks are mitigated by conservative basecase modeling and the fact that SPVs are fully cross-collateralized, 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 are taking risk on the exclusive offtake of electricity to an industrial user, the sponsor Ineos that 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 an attractive rate of £30 per megawatt hour, 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.  

Financial close for Manchester, the tender for which was first launched in February 2005, had been scheduled to close in December 2008, but was delayed by the inherent complexities of the double SPV structure and the paucity of liquidity among commercial banks. Bank of Ireland had been expected to take £200 million but pared back its commitment and a number of banks withdrew due to a combination of the project's complexity and liquidity constraints.

The double-SPV structure was deemed by the banks the most efficient structure for combining the financing for two projects in which shareholders wanted different interests. The genesis 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 probably not the case in this instance as Ineos has no significant experience or interest in waste handling PFIs, so the double SPV structure was pursued.

Complex credits are difficult to get away in the best of times, so the closing of Manchester Waste should be regarded as a sign of the resilience and adaptability of UK PPP. Next a bigger but simpler affair: the M25.

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; Infrastructure Finance Unit
Sponsors' legal counsel: Pinsent Masons (Viridor/Laing); Ashurst (Ineos)
Lenders' legal counsel: Addleshaw Goddards
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