Limerick Tunnel PPP: The long and the short of it

Convert or doubter – and the bank market is truly split on this one – the Eu258 million Limerick Tunnel conduit financing was the first of its kind in the global PPP market and the first monoline-wrapped PPP in Ireland.

Lead arranged by HBoS, the deal combines the flexibility of a loan with the tenor of a bond, features no negative bond carry and appears to have overcome the issue of a pricing mismatch between long-term debt funded in the short-term variable CP market.

Sponsored by DirectRoute – a consortium comprising Strabag (40%), John Sisk & Son (20%), Lagan Holdings (20%) and Roadbridge (20%) – with CIT advising, the Limerick package features Eu143.5 million of senior conduit debt and a Eu97.6 EIB loan (both wrapped by MBIA) along with Eu18 million in mezzanine debt provided equally by AIB and Meridiam. The overall tenor on the deal is 34 years leaving a two-year tail on the 36-year concession.

DirectRoute had wanted an edge over the competition at the original tender stage and although the consortium recognised the conduit solution would take longer to structure than a traditional debt solution, the financial cost savings and long tenor made the development time worthwhile. As Gerry Cawley, Chairman of DirectRoute Limerick Ltd and PPP/PFI Director at Lagan says: " We were delighted with the project and the performance of the team. The deal enabled us to secure a strategic project and we would not hesitate to do it again."

The Eu143.5 senior debt (which includes a Eu41 million bridge loan) is structured through HBoS Treasury Services administered CP conduit Landale Asset Purchasing Company No. 3. In effect, DirectRoute issues privately placed notes, as and when needed, to the conduit and the conduit then borrows from the short-term commercial paper market in the US and UK and lends the proceeds back to DirectRoute.

The deal has opened a new (1-6 month) investor base – the CP market – to PPP projects. But there are still doubts about the long-term viability of the structure – primarily the pricing mismatch issue.

That potential mismatch – between long-term financing and short-term CP market – is overcome by a matching liquidity line from HBoS: a fact reflected by A1-plus and P1 short-term ratings from S&P and Moody's respectively. If the CP market becomes expensive the liquidity line kicks in and the conduit can, if need be, pay off investors.

Conversely, when the CP market is cheap the conduit can borrow as much as it can raise. The economic effect, as claimed by those involved in the deal, appears to be very flexible long-term funding.
The combination of structure (CP margins are a lot cheaper than loans or bonds), the cheap availability of wraps (down to 15-20bp) and pricing mechanism – debt pricing is fixed during construction and then a combination of fixed and Irish CPI index-linked because the project is real toll – also creates highly competitive sub-50bp funding.

The deal was a long time in the making. First announced in 1999, the real toll project is for 10km of new road and a 900m immersed tube tunnel under the Shannon river – both procured under a fixed-price, date-certain DBFO contract.

The tunnel will link all national routes converging on Limerick from Dublin, Tipperary, Cork, Kerry, Waterford, Ennis and Shannon Airport and is expected to cut traffic in Limerick City by 40,000 vehicles per day. Senior debt holders are largely insulated from traffic volume through a traffic guarantee mechanism granted by concession awarder the National Roads Authority (NRA).

In the Limerick deal, HBoS appears to have engineered a solution that could be applied in other European PPP markets. The deal features real risk transfer at low cost, an off-balance sheet solution that sponsors in a number of European markets have been attempting to get right for some time.

The structure was quickly repeated in the UK with HBoS, MBIA and Citicorp closing the £170 million refinancing by The Hospital Company (Swindon and Marlborough) Ltd (THC) of the Swindon & Marlborough hospital project within weeks of Limerick. That deal was also the first PPP refinancing to use a conduit. Swindon and Marlborough was very similar to Limerick but with some subtle differences: the issue was in sterling rather than euros, there was no EIB debt and pricing was fixed with RPI funding.

Limerick Tunnel PPP
Status: Financial close 18 August 2006
Size: Eu258 million
Description: First PPP conduit financing
Concession awarder: NRA
Sponsor: DirectRoute
Financial advisory: CIT
Arranger: HBoS
Trustee: Citicorp
Legal counsel to sponsor: AL Goodbody
Legal counsel to EIB: Clifford Chance
Legal counsel to lenders: Linklaters
Legal counsel to NRA: McCann Fitzgerald
Financial advisor to NRA: KPMG