Golden Ears: Offshore wrapping

The C$1.046 billion ($900 million) financing for the Golden Ears bridge uses a wrapped offshore bank loan to achieve the tightest pricing yet for a Canadian PPP. The offshore solution is a simple but neat one given monolines are banned from wrapping Canadian domestic deals.

The deal also features a range of firsts for Canadian PPP – first monoline-wrapped financing of a PPP project in Canada; first consumer price index (CPI) swap of a PPP project in Canada; largest interest rate swap of a PPP project in Canada; and largest private financing for a greenfield PPP project in Canada.

Golden Ears is a project to build a 1km, six-lane bridge across the Fraser River, connecting Maple Ridge and Pitt Meadows in the eastern suburbs of British Columbia's largest city, Vancouver.

The project also includes 14km of controlled access arterial roads connecting the bridge to the existing road network on both sides of the Fraser River and municipal road upgrades to improve traffic flows and facilitate the integration of the new crossing into the existing road network.

The overall project cost is C$1.1 billion comprising C$858 million related to construction, payment of a license fee and other costs; and C$259 million interest during construction and reserves funding. A further C$166 million is funded by the Greater Vancouver Transportation Board (Translink) for property acquisition, tolling, third party agreements, and project development costs.

TransLink issued a request for qualifications in October 2004. In December 2005, the Golden Crossing Group (Bilfinger Berger, CH2M Hill, Buckland and Taylor, and Capilano Highways Services) was selected as preferred bidder, with Depfa Bank and Dexia Credit Local as mandated arrangers. Cheung Kong had originally been a consortium member but pulled out leaving only Bilfinger as equity provider.

The 35.5-year concession – awarded to special purpose company Golden Crossing General Partnership (GCGP) – is a fixed, unitary, availability payment with standard penalty deductions and no volume component. TransLink does not make a single payment to the concessionaire until the bridge goes into service.

Furthermore, TransLink has capped and deferred capital payments over the first five years to allow traffic volume to build and to avoid high payments in the early years when costs may exceed toll revenues (after the five year cap unitary payments rise with inflation). And unique to this project, TransLink has the ability to independently effect a refinancing of the project if more favourable terms can be leveraged.

The revenue profile, as well as the sponsor's need to minimise its equity contribution, were the main factors shaping the financing structure. The gap between the start of construction and the end of the inflation cap also presented challenges to the sponsor, since costs are not likely to be similarly capped. This can be budgeted for, and both the model, and any debt repayment schedule adapted accordingly, but the project is still at the mercy of changes to the CPI.

According to Massimo Polveraccio, vice-president, project finance at Bilfinger Berger BOT Canada, "a number of financing solutions were evaluated including unwrapped bank debt, unwrapped bonds, wrapped conduits and index-linked bonds. The preferred financing solution provided an optimal mix in terms of the tenor, margins and coverage ratios. It also provided significant flexibility to GCGP as an extended grace period was negotiated with the lenders, which helped manage the five-year cap period. Moreover, a high degree of commitment could be obtained with respect to the financing at bid submission, which was also key to TransLink."

Bank debt offered a more flexible drawdown schedule customized to the construction schedule of the project compared with a straight bond issue. The 34.5-year bank tenor was also competitive with the various bond options thereby allowing GCGP to achieve the lowest NPV price.

"However, long-tenor loans (without any supporting guarantees) were not being priced efficiently by the banks. Underwriters were also offering unattractive pricing without significant credit enhancement as the underlying project debt rating was barely investment grade due to the perceived risks associated with construction. For this reason, Bilfinger Berger looked into the possibility of using wrapped debt structures, including wrapped bank debt," adds Polveraccio.

Bilfinger's first innovation was to work round the prohibition on monolines working in Canada by arranging for them to wrap debt booked offshore. It selected XL Capital Assurance to be the insurer, with Ambac joining later and taking half of the exposure.

With the wrap in place the lead arrangers were able to book the loan with a 0% risk rating and consequently the debt priced, all-in, at around 70bp over CDOR.

More complex than wrapping the debt was swapping it. Not only is the debt swapped into fixed rate by the two leads, a task that can be expensive but is relatively common, but Depfa also provides a CPI swap to the project. The second is important, since lower than expected inflation, while reflected in payments from the province, might not be reflected in debt service payments. The swap eliminates this potential mismatch.

The final financing consists of a C$963 million 32-year senior term loan underwritten by Dexia and Depfa, a further C$31 million subordinated loan from DEPFA and $52 million in sponsor equity, which is initially funded through a bridge loan from the lead arrangers. The project is scheduled to be complete in 2009 with a joint venture of Bilfinger Berger Civil (66%) and CH2M Hill (34%) as EPCs.

Golden Crossing Group
Status: Closed 3 March 2006
Project cost: C$1.1 billion ($900 million)
Debt: C$963.4 million
Location: British Columbia
Description: DBFO P3 bridge project
Concession awarder: Greater Vancouver Transport Authority
Sponsor: Bilfinger Berger
Lead arrangers: DEPFA; Dexia
Monolines: XL Capital; Ambac
Financial adviser: PricewaterhouseCoopers
CPI swap provider: RBC Capital Markets
Legal counsel to lenders: Norton Rose; McCarthy Tétrault
Legal counsel to sponsors: Davis & Co
Legal counsel to monolines: Linklaters; Blakes; Torys
Technical auditor: KBR
Financial model auditor: Operis