Syndication of the £2.19 billion ($4.4 billion) 25 year loan backing AirTanker's Future Strategic Tanker Aircraft (FSTA) RAF refuelling plane PFI contract (worth £13.5 billion over the whole life of the concession) launched at end of April and is scheduled to complete on 28 May.

The deal arguably sets a benchmark for financing large projects – such as the £5 billion upgrade and widening of the M25 London orbital – in a patchy monoline market.

Under the 27-year concession, AirTanker will own and provide 14 fully converted A330-200 tanker transport with associated maintenance, flight/fleet management and ground services, replacing the RAF's current fleet of ageing VC10 and TriStar aircraft.

The deal proceeded at the end of 2007 as a bond-bank deal with Ambac installed as the primary monoline expected to wrap 50% of the debt (£1.2 billion) and MBIA as the secondary monoline to wrap around 25% of the debt.

The wrapped-bond component was dropped early in the New Year however, when bond managers said that no one was interested in buying Ambac paper following the threat and subsequent demise of its AAA rating. Other monolines, such as Assured Guaranty were precluded because they did not take part in the funding competition and were unfamiliar with the intricacies of the deal.

The sponsors decided not to proceed with the secondary monoline as the sole insurer, due to the associated complexities of intercreditor agreements. Monolines usually have a principal role in monitoring the project company and act as agent for the creditors when a project is in trouble because they have most to lose – not the case where it is a minority creditor.

Moody's rates the project company two notches above investment grade at Baa1 during the 8.5-year build-out phase, which is based on the model of an expected loss of less than 0.45% in the first four years. While the project scope is more complex than most PFIs, it is at the simpler end of the spectrum of lead sponsor EADS' business – the Airbus A330-200 is almost a commodity product in aircraft terms. Any delays are expected to be confined to the first few aircraft as efficiencies are found through repetition.

A Baa1 rating is unusually strong for a PFI project and reflects EADS's (A1) termination guarantee. EADS's obligations reduce on completion and are replaced by a suite of LC-backed support commitments from the sponsor group.

Also, unusually for a PFI contract, the lenders are not obliged to find a replacement contractor on default because there are no other manufacturers of Airbuses, but they have the option to accelerate their debt and trigger termination of the contract. In such a scenario compensation from MoD kicks in which should be sufficient to repay funders in full in most scenarios.
The resulting bank loan financing – lead arranged by Bank of Scotland, BayernLB, BBVA, Calyon, Fortis, Lloyds TSB and Royal Bank of Canada – is a 25-year facility split between a £2.15 billion amortising term loan and a £45 million liquidity facility.

The margin starts at 100bp over Libor during construction, rising to 105bp until 2022, 110bp until 2028 and 115bp thereafter. Mandated lead arrangers (MLAs) have been invited to commit £100 million for a 100bp fee, lead arrangers £75 million for 75bp and arrangers £50 million for 55bp.

Given the strength of the sponsor group – EADS, Cobham, Rolls-Royce, Thales UK and VT Group – and the structural comfort in the contract, the lead arrangers are confident of a successful syndication. As one source on the deal says: "With the margin and fees on offer for the amount of risk, on a risk-reward basis this project is far better than any out there."

During operation Moody's expects the rating to lift from Baa1 to A. The principal aim of the private parties in negotiations was to secure contractual comfort by achieving a benign as possible compensation and penalty framework, rather than rely on contingent guarantees from the Ministry of Defence.

The key dates from the lenders perspective are months 42, 60 and 78 into the contract. The tightest period is in month 42 just prior to delivery of the first aircraft (introduction to service (ITS)). At ITS senior debt liabilities are forecast at £1.395 billion with £679 million of milestone payments leaving projected net exposure at £716 million. Exposure rises again, to another pinch point in month 60, as production is ramped up to two aircraft conversion lines running simultaneously. At month 78, the scheduled in service date (ISD) when nine aircraft are timetabled to be delivered, is the final pinch point when EADS termination guarantee halves to £500 million.

The project benefits from a high level of availability style payments – the guaranteed minimum consumption (GMC) – providing a 1.15x senior debt minimum and average DSCR even in no-fly scenarios. GMC is still dependant on prompt and proper delivery of service. With basecase usage factored in the MDSCR becomes 1.33x and ADSCR 1.35x. The heavy reliance on availability payments reflects that the contractual documentation and payment mechanism are, according to Moody's, "complex, bespoke and untested."

From an equity perspective, the contract with MoD allows recovery of the capital cost of all 14 aircraft and the scheduled operating costs of the core fleet of nine aircraft, but does not directly cover marginal base maintenance costs of the remaining five aircraft, which must be recovered through reserves or lease agreements with third parties.

The deal, though complex should tempt banks to book assets with healthy margins. On senior debt interest and fees the sponsors are spending £783,741 on a £2.2 billion deal before swaps and other fees, nevertheless in the current market fuller sponsor guarantees and a dent to IRR is better than no deal at all. All-bank groups for large deals maybe here to stay.

AirTanker Finance Ltd
Status: Financial close 27 March 2008, syndication scheduled to be complete 28 May.
Description: 27-year, £13.5 billion PFI concession to supply refuelling aircraft to the Royal Air Force
Sponsors: EADS (40%); Rolls-Royce (20%); Cobham (20%); Thales (10%); VT Group (10%)
Mandated lead arrangers: Bank of Scotland; BayernLB; BBVA; Calyon; Fortis; Lloyds; RBC
MoD financial adviser: KPMG
Sponsor financial adviser: Deutsche Bank
Grantor legal adviser: Simmons & Simmons
Borrower legal adviser: Clifford Chance
Lender legal adviser: Linklaters
EPC: EADS; Rolls-Royce