The book on the Westdeutsche Protonentherapiezentrum Essen (WPE) project bond is expected to close in late September. At Eu136 million the deal is both the first major health PPP in Germany featuring real risk transfer to the private sector and, more significantly, the first German bond/ notes-financed PPP.

Unlike bond deals in other European PPP markets where the economics are largely influenced by increasingly cheap monoline wraps (down to 30bp as a market average), WPE is not triple-A wrapped. Despite the lack of wrap, market rumour prices the deal competitively with typical UK PFI deals plus a technology risk premium at 100bp-plus over Euribor.

The monoline route was never explored for a number of reasons. First the arrangers felt the market was liquid enough to get the deal away competitively without a wrap. Second, had the deal been wrapped it would have required lengthy negotiation with both monolines and ratings – although the project calendar had some slippage in it, a June 30 close was a must to avoid restarting the procurement process. Third, with interest rates rising, any benefit generated by a wrap could be negated by future rate hikes during a longer negotiation period.

Awarded by Universitatsklinikum Essen to STRIBA – a joint venture between STRABAG Projektentwicklung and proton therapy technology equipment specialist IBA – in December 2005, the project is a 19-year availability-based design, build, finance and maintain (DBFM) contract, inclusive of a four-year construction period.

The proton therapy centre will be a turnkey facility and repaid by monthly lease payments. The first patients will be treated in 2009 and the facility will be fully operational by 2011.

The initial cost of the project is Eu136 million with construction cost estimated at Eu115 million which includes Eu50 million for the equipment provided by IBA. The total project cost including the non-clinical operation and maintenance of the centre will run to around Eu300 million over the term of the concession.

Lead arranged by Deutsche Bank (bookrunner and documentation bank) and Fortis (technical and insurance bank), the initial Eu136 million debt comprises a Eu122 million tranche of 18.5 year fixed rate notes (giving the financing a six month tail) underwritten 50/50 by Deutsche Bank and Fortis Bank; a Eu7 million mezzanine tranche of notes solely underwritten by Deutsche Bank to reduce sponsors' exposure; and Eu7 million of junior notes underwritten by the sponsors. Debt to equity ratio is 90/10.

The sponsors are also putting Eu50,000 of pinpoint equity into the deal to bankroll both the STRIBA special purpose company and PTC Capital Essen – a Luxembourg-based vehicle from which all the notes are issued and which purchases future receivables from STRIBA.

Consequently the repayment mechanism is effectively a twist on a typical German forfaiting scheme (in effect a forfaiting deal refinanced with notes) that negates the need for a bridging loan during construction (typical of a forfaiting scheme), enables the sponsors to tap a wider investor base but also enables future payments to be structured to reduce trade tax, as in a forfaiting deal.

Although the deal comes with no demand risk it does incorporate performance and technology risk – both for the sponsors and lenders.

Proton therapy is cutting-edge technology and although IBA worked with Fortis on a similar US project in 2004, WPE is the first IBA has delivered in Europe and its first PPP financing. Consequently the technology has no long-term track record.

In addition, the buildings and technology are an interactive design and were the technology supplier to go bust finding new equipment and parts could be problematic.

WPE is good news for what has been a very conservative and low volume German PPP market to date. Sadly, cancer treatment is a growing market and a similar particle therapy deal is expected soon in Kiel, north Germany.

But the real significance of WPE is the financial engineering – by German standards it is innovative and widening the PPP investor base may stimulate further similar deals in other sectors. It was also very quick to structure – six months from award to financial close.

And Germany needs to get its PPP market moving. Minister of Finance Peer Steinbruck has publicly announced his desire to increase the number of PPPs in public investment from 4% to 15% as seen in some other industrial countries. It is not political rhetoric but a desire born of financial need – against a backdrop of an impending pensions crisis Germany needs private sector infrastructure investment to free up state cash.

Furthermore, the federal government is giving full backing to PPPs across the board. In 2004 the Public Private Partnership Task Force was launched to assist selected pilot projects on national, regional and local authority levels. It aims to pass on expertise and develop uniform PPP standards. Similarly, 2005 saw the PPP acceleration law come into force and a second PPP Acceleration Act is planned which will reform tax regulations.

PTC Capital Essen
Status: Closed 28 June 2006
Size: Eu136 million (Initial) Eu300 million (duration)
Description: Proton therapy centre PPP for Essen University Hospital
Sponsors: Strabag, IBA
Lead Arrangers: Deutsche Bank, Fortis
Legal counsel to sponsors: Freshfields
Legal counsel to lenders: White and Case
Legal adviser to concession awarder: Luther Rechtsanwaltsgesellschaft
Technical adviser to lenders: Electrowatt Ekono