Alberta Schools: Building blocks

The financing for the first Alberta schools concession was testament to creativity in financing in a constrained market, and to the province's will to get the deal closed. The consortium comprises Babcock & Brown Public Partnerships (BBPP) with a 75% equity stake, and GVest, Graham Construction's investment vehicle, with 25%. The financing closed as the project sponsor's manager and financial adviser, Babcock & Brown, was collapsing, and at the height of the credit crunch, the day before the fall of Lehman Brothers. Construction is underway and on schedule, though presently paused due to winter weather conditions.

The debt was structured with a combination of bank and bond debt, which had not previously been mooted for such a deal in Canada and did not include pricing flex, despite arrangers' preference during this period to have flex provisions. Though the hybrid debt solution made a virtue of a necessity, as a scramble for debt providers, it is a model which is being replicated in a number of Canadian infrastructure deals, including the Niagara St Catharine's hospital, which is due to close imminently. The 32-year concession is to design, build, finance and maintain 18 primary schools, nine in Edmonton and nine in Calgary. The concession length includes a 22-month construction phase, which remains on schedule and is due to be complete by July 2010, as well as hard facilities management.

The total debt was C$465 million ($373 million), arranged into four tranches; one short and one long bond tranche, and one short and one long bank tranche. Providers of the C$180 million in bank debt were Bank of Ireland, SMBC and National Australia Bank. Each of the three provided a commitment of C$45 million, to the 31-year term loan, and C$15 million to the 22-month short-term loan. TD Bank, Bank of Montreal and ManuLife provided C$80 million in short-term paper, also with a 22-month maturity. SunLife, CanadaLife and CIT provided the remaining $205 million in 31-year bonds, with SunLife taking the majority.

The senior bank debt and the longer tenor bonds came in with roughly similar interest rates; the bank piece was priced at 140bp over CDOR, and the bonds at 190bp over the equivalent Government of Canada bonds. The short-term bank piece was priced at 205bp over CDOR.

The province will provide a C$125 million milestone payment at the end of the construction phase, which the sponsor will use to pay down part of both tranches of short-term debt. The deal also features 8% equity, or roughly C$35 million.

As with many social infrastructure projects in Canada, the province required a letter of credit (LC) from the consortium. Each bidder was required to provide C$1 million at the time of lodging their bids, and when the preferred bidder was named, it put up a C$10 million LC. The full LC remains with the province until C$10 million in construction has been completed.

Despite the problems at Babcock & Brown, the BBPP fund is financially independent from its namesake (Babcock & Brown has an 8% interest in the fund), and therefore the project was not adversely affected by the affiliation with the troubled parent company. According to Bianca Francis, chief operating officer at BBPP, the fund is looking at ways to sever the B&B relationship, following the announcement that Babcock is winding down its operations and selling its assets.

Graham and Bird Construction are the EPC contractors, and Honeywell will provide facilities management services. Graham and Bird will each build nine schools, four schools in one city and five in the other. All of the sites are predominantly greenfield, in residential areas. According to the sponsor, the schools had been included in the development plan for these areas for some time, and as the population increased, so did the imperative for the educational facilities.

The construction process was also untested in the Canadian market. All of the schools will be constructed from modular units, following similar designs. The units come in three models; one each for the Kindergarten-to-four-years (K-4) schools, K-6 and K-9 schools. There will be 216 of these units for the 18 schools, and they can be plugged-in or unplugged, and moved between facilities, as population demographics in the neighbourhoods change, and demand shifts. The province estimates that without private participation, these schools would have taken 5 years to build. Stefan Parche, who is now managing BBPP's North American assets, also adds that the province estimates the project's value for money saving at C$118 million, as the project will cost C$634 million over the 32-year concession, and the province had estimated its cost at C$752 million without private participation.

According to Duncan Ball, who led the deal for BBPP before moving to Bilfinger Berger in November 2008, the project was a success largely due to the province's commitment. "Compliments to Alberta, the province really understands how infrastructure financing works, and was very responsive to market circumstances which were changing quickly. The project also benefited from great local partners on the construction side."

Indeed, this adaptability on the part of Alberta Infrastructure and the government is evident in the planning for the procurement of the next package of schools. The second concession involves 14 elementary and high schools, the latter of which are technically more challenging. The project is also valued at around C$500 million. But sources close to the projects suggest that this proposed concession may be split into two smaller deals, of between C$200 million and C$300 million.

According to both sponsors and lenders active in the region, one of the main reasons for it considering carving up the concession is contractor capacity. "In Canada, the most competitive pricing for such construction comes from the mid-tier contractors, but they do not have the balance sheet to cope with such large projects," explains one prospective bidder. He continues, "Both the local contractors and the province are reluctant to team-up with large international building companies, when the model can be manipulated to fit its market. Moreover, in this economy, smaller packages of schools will be easier to finance."

BBPP Alberta Schools Limited
Status: Closed 12 September 2008
Size: C$500 million
Location: Alberta, Canada
Description: 32-year concession for the construction and maintenance of 18 elementary schools
Concession awarder: Government of Alberta, through Alberta Infrastructure
Sponsors: Babcock & Brown Public Partnerships (75%), GVest (25%)
Debt: C$465 million, combination of bond and bank debt
Long tenor bank lenders: Bank of Ireland, NAB, and SMBC
Long tenor institutional lenders: Sunlife, Canada Life and CIT
Short tenor lenders: Bank of Ireland, NAB, SMBC, Manulife, Bank of Montreal, TD Bank
Lender legal: Fasken Martineau
Sponsor legal: Davis
Technical adviser to lenders: Altus Helyer
Insurance adviser: Intech
Model auditor: PKF