P3 in Canada is normally funded using either commercial bank debt from European lenders or private placements with domestic institutions. Public bond issues have struggled with limited liquidity, and have been unable to use wraps, since monolines are prohibited from operating in Canada. And Canadian banks still have limited interest in the P3 market.

But the C$1.046 billion ($900 million) financing for the Golden Ears bridge uses a wrapped offshore bank loan to achieve the keenest pricing yet seen in the Canadian PPP market. It looks like being a viable option for other developers, since all it essentially requires are a project with an investment grade rating and lenders that can book assets offshore.

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. Originally named the Fraser River Crossing, the project was renamed in a more colourful fashion after a nearby mountain feature.

The Greater Vancouver Transportation Board (Translink) issued a request for qualifications in October 2004. Three groups responded and prequalified in December 2004 – RiverLink (Vinci, Canadian Highways Infrastructure Corporation, Balfour Beatty, Egis, Aecon, Klohn Crippen and Jean Muller International), Fraser Valley Connector (Macquarie, Peter Kiewit, Skanska, Flatiron Constructors, Miller Paving, Hatch Mott MacDonald, HNTB, ND LEA, and International Bridge Technologies), and Golden Crossing (Bilfinger Berger, Cheung Kong, CH2M Hill, Buckland and Taylor, and Capilano Highways Services).

In December 2005, the Golden Crossing group was selected as preferred bidder, with DEPFA Bank and Dexia Credit Local as mandated arrangers. By this time Cheung Kong had pulled out, but the remaining consortium members were in place, although of these only Bilfinger is providing any equity.

The concession is notable in that it does not feature any traffic-related revenue component at all. Translink will be collecting tolls on the bridge, and keeping the revenue, but does not share any of the potential up- or down-side with the holder of the 35-year design-build-finance-operate concession.

Instead, the concessionaire bid on the basis of a fixed, unitary, availability payment with standard penalty deductions, but no volume component. But the bidders had to factor traffic volumes into their maintenance budget. The result, from the point of view of Translink, is highly attractive. The unitary payment is fixed for the first five years of the concession, and increases thereafter with inflation.

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 presents 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, the sponsor considered a straight loan and a Canadian real return bond, which would track inflation. The loan market, however, while liquid, would not proof against inflation, while the real return bond market in Canada is not liquid enough to offer the terms and pricing necessary to the borrower's economics.

The sponsor's first innovation, which in retrospect seems simple enough, 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, and XL was joined by Ambac, which took half of the exposure. Such an arrangement, according to sources close to the deal, was not too difficult to structure, although it may have been easier to accomplish for a bank loan than for a bond financing.

Moreover, since the loan has an AAA rating as a result of the wrap, the lead arrangers can book the loan with a 0% risk rating. Thus the two leads, both public finance banks with a hunger for such assets are unlikely to syndicate any of their positions down. The debt is understood to be priced, all-in, at around 70bp over the CDOR.

More complex than wrapping the debt is 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 total financing consists of a C$963 million senior term loan of 32 years, three years within the 32-year post-completion concession length, a 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. The engineering, procurement and construction contractor is a joint venture of Bilfinger Berger Civil (66%) and CH2M Hill (34%). The construction project is relatively straightforward, although the lack of a rock bottom to the Fraser River means that sinking the piles for the bridge is more complex than for a rock foundation.

The structure pioneered on Golden Ears takes the Canadian PPP market even further out of the grasp of the Canadian banks. Indeed, since it encourages lenders to book assets offshore it levels the playing field even further. Moreover, providing that there is sufficient appetite at the public sector banks for such assets, the pricing means that there is very little reason to suppose that a sponsor would refinance in the capital markets.

Golden Crossing Group
Status: Closed 3 March 2006
Size: C$1.046 billion ($900 million)
Location: British Columbia
Description: DBFO P3 bridge project
Sponsor: Bilfinger Berger
Lead arrangers: DEPFA Bank, Dexia
Monolines: XL Capital, Ambac
Legal adviser to the lenders: Norton Rose, McCarthy Tétrault
Legal adviser to the sponsors: Davis & Co
Legal adviser to the monolines: Linklaters, Blaken, Torys
Legal adviser to Translink: Farris
Financial advisers to Translink: TD Securities, KPMG (process adviser)
Sponsor's insurance adviser: Marsh
Lenders' insurance adviser: JLT
Model auditor: Operis
Independent engineer: KBR
Design: Buckland & Taylor
Operations: Capilano Highways Services
Sponsor financial advisers: PwC, E&Y