The conduit structure engineered by HBoS for the Eu258 million Limerick Tunnel project appears to be another major evolution in the growing infrastructure capital market.

Black box conduits are not new – but this is the first time one has been used for a PPP deal anywhere in the world.

The deal combines the flexibility of a loan with the tenor of a bond, features no negative bond carry, appears to have overcome the issue of a pricing mismatch between long-term debt funded in a short-term variable market, has opened a new (1-6 month) investor base to PPP – and most significantly has priced at sub 50bp.

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 by AIB and Meridian. The overall tenor on the deal is 34 years leaving a two-year tail on the 36-year concession.

The deal has been 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. Senior debt holders are largely insulated from traffic volume through a traffic guarantee mechanism granted by concession awarder the National Roads Authority (NRA).

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 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 – on cancellation of the previous bank debt existing swaps are novated rather than terminated.

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), the cheap availability of wraps 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 is good news for both the sponsors and the NRA which has been actively promoting capital markets solutions for its road programme, which to date has been largely financed in the project loan market.

The structure has already been repeated. HBoS, MBIA and Citicorp have just closed the £170 million refinancing by The Hospital Company (Swindon and Marlborough) Ltd (THC) of the Swindon & Marlborough hospital project – this time the first PPP refinancing to use a conduit.

Swindon was originally expected to be the first conduit deal to close but was held up by controversy over the Norfolk and Norwich Hospital refinancing. The deal is very similar to Limerick but with some subtle differences: the issue will be in sterling rather than euros, there is no EIB debt and pricing is fixed with RPI funding.

HBoS also 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.

Limerick Tunnel PPP
Status: Financial close mid-August
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
Advisor to NRA: KPMG