A consortium led by Babcock & Brown Public Partnerships (BBPP) reached financial close on its Alberta schools project on 19 September 2008, under decidedly trying circumstances. The deal is the first social infrastructure PPP to close in the province, and did so in the teeth of difficult credit markets. It did so using a combination of bank and bond debt, which has fast become the norm in the country because of the troubles of the monolines and specialist public sector lending banks.

That the deal closed at all, without pricing flex, is testament to the banks' and sponsors' tenacity. But if sponsors continue to demand bank exclusivity during the procurement phase this will exacerbate their problems in raising debt. And while the flexibility of bank tranches and the tenor of bond debt may appeal to borrowers, intercreditor issues have the potential to create sticking points. The hybrid financing may have brought Alberta Schools over the finishing line, but is nonetheless a reaction to troubled financial markets, rather than a preferred solution.

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 is due to be complete by July 2010, as well as hard facilities management.

The province issued a request for qualifications (RFQ) for the project in the third quarter of 2007, and released the shortlist in December 2007. The province then issued a request for proposals in February 2008, and received bids on 4 July. After being named preferred bidder on 5 August, ahead of Plenary, and Carillion with Acciona, the BBPP consortium reached financial close on 12 September 2008.

BBPP used a combination of bond and bank debt for the roughly C$500 million ($445 million) project. The total debt was C$465 million, arranged into four tranches; one short and one long bond tranche, and one short and one long bank tranche. The adviser to the sponsor, was Babcock & Brown, which manages the sponsor and has been through recent, well-publicised financial difficulties, but whose financial troubles did not ultimately leak into the fund.

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 province will provide a C$125 million milestone payment at the end of the construction phase, which the sponsor will use to pay down both tranches of short-term debt. The deal also features 8% equity, approximately C$35 million, of which BBPP is providing 75%, and GVest, Graham Construction's investment vehicle, the remaining 25%.

As with many of the 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.

Duncan Ball, managing director at Babcock & Brown, and project director on Alberta Schools, notes that a key factor in the financing was that the pricing on the debt was not flexed, which is increasingly unusual in the present market, and that the sponsor's cost of capital was the lowest of the three bids received for the project. He describes the pricing on all tranches as competitive, though market sources suggest that the bank tranche was priced in excess of 170bp over CDOR.

Peter Hepburn, who led the deal for CIT, expects that combined bond and bank financings will be replicated in Canadian social infrastructure projects, "It's a response to market capacity constraints. The issue is in a deal like this one, that three bidders all with committed financing may require exclusivity, so essentially three times the financing is required at the bidding stage." Ball also commented that they managed to close the deal just 38 working days after being named preferred bidder.

Graham and Bird Construction are the EPC contractors, and Honeywell will provide facilities management services. Graham and Bird will each build four schools in one city and five in the other. All of the sites are predominantly greenfield, in residential areas. According to Ball, the schools had been planned as part of 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 is also untested in the Canadian market. All of the schools will be constructed from modular units, under similar models. The units come in three designs; 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, to be moved between facilities, as population demographics in the neighbourhoods change, and demand shifts.

The province estimates that without the private participation, the project would take 5 years to build. It also calculates the value-for-money saving at around C$100 million.

Alberta Infrastructure has two further PPP projects in its pipeline, both with requests for qualifications that are set to be issued in the fourth quarter of 2008. The first is another schools project, a package of 14 elementary and high schools. The second is a community development hub in Fort McMurray, which will include schools, residential accommodation, retail, and transportation infrastructure to provide services to new workers in the oil sands region.

BBPP Alberta Schools Limited
Status: Closed 19 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
Mandated lead arrangers (bank tranches): Bank of Ireland, SNBC, NAB
Institutional debt providers: CIT, CanadaLife, SunLife, TD Bank, Bank of Montreal, ManuLife
Lender legal: Fasken Martineau
Sponsor legal: Davis
Technical adviser to lenders: Altus Helyer
Insurance adviser: Intech