Closed on 19 December, Barcelona's Eu320 million project to build a new judicial/administrative complex is the first UK-style Spanish PPP concession in the government accommodation sector where lenders are exposed to some real performance risk. The deal is also the first major PPP to close that focuses on cost of state payments rather than the value a sponsor can extract from a project.

The concession is a 35-year DBFM contract between the Generalitat de Catalunya (the regional government) and the URBICSA consortium – comprising FCC, Ferrovial, OHL, Copisa and Emte – for administrative buildings including the future headquarters of the Barcelona courts and the Hospital de Llobregat.

Situated on the site of an old army base on the city's outskirts, the complex will comprise eight buildings spread over 230,000 square metres. It will replace nine buildings scattered around Barcelona, allowing the city to concentrate its administrative employees in one place and sell off the old buildings. The contract also includes the operation of offices, shops and a 1,700-place garage. Construction is scheduled for completion in 2008.

Financing for the project consists of a Eu282.1 million term loan with a 28-year tenor and a Eu14.5 million liquidity facility. Both tranches have been provided by Banco Sabadell and Santander Central Hispano (SCH), each underwriting half of the debt, and wrapped by XL Capital. The monoline has also wrapped an interest rate hedge on the senior debt. The banks are also providing a Eu27.5 million unwrapped VAT facility during the construction period.

Given the low margins on Spanish PPP debt it is hard to see why a monoline wrap has been incorporated into the deal. All-in pricing (wrap plus debt) is 80bp rising to 100bp over term – so the wrap must be very cheap.

The average cover ratio over the life of the project is 1.3x, while the minimum cover ratio is 1.16x.

The wrap can be viewed as a leftover from project conception and symptomatic of the deal's history. The Generalitat selected URBICSA as preferred bidder in July 2003 when margins on Spanish PPP deals were nowhere near as low as they are today. After URBISCA had won the concession, it invited bids from the monolines and XL Capital was mandated in March 2004.

However, around the same time the concession was put back on the drawing board after regional elections in November 2003 returned a different government. The rethink was partly a response to local concerns about the size of the proposed complex. The concession was not re-tendered, but it was amended to make the project around 20% to 25% smaller than originally planned.

Consequently, the deal that emerged last December was one originally intended and engineered a year earlier when debt margins were higher. Furthermore, and margins aside, the presence of a monoline has some advantages for Banco Sabadell and Santander – the debt has a zero-weighting on their balance sheet, so there is no need to syndicate.

Despite the slightly incongruous financial engineering the concession contract sets the deal apart from many previous Spanish PPPs. The project carries relatively little revenue risk and, as is the case in the UK PFI model, the payment mechanism was clearly defined in the terms of the concession agreement. This gave the project a predictable stream of receivables and put the emphasis on the sponsor's ability to deliver the project to cost and on schedule. Concession terms for past Spanish PPP deals (the majority of which have been roads) are typically less complex than this and have centred on the sponsor's ability to extract value from the project through revenues.

Seventy percent of the project's revenue comes from availability payments. Of these payments, 80% are fixed rentals that are not subject to deductions, while 20% is for maintenance operations that are subject to deductions. The remaining 30% of revenues are rentals from URBICSA's exploitation of Ciudad Judicial's commercial opportunities – namely shops and parking. Total revenue over the duration of the concession is expected to be Eu1.5 billion.

Moreover, the terms of the concession are actually quite generous, with the Generalitat taking on board quite a lot of the project's risk. In particular, the availability payments' 80-20 split between non-deductible and deductible payments is higher than is usually seen on UK PFI projects – 60:40 is a more common ratio. Consequently, the risk of URBICSA defaulting is very small.

The Ciudad Judicial marks a clear break from previous Spanish PPPs and has created a template that looks like being used for the Madrid judicial complex, a project that is to be tendered later this year. It remains to be seen, however, how widespread its popularity will become in a country where the PPP process is more decentralised than in the UK and a more disparate set of financial models have been tried out.

The next Spanish PPP projects to close should be the eight hospitals that were tendered by the Madrid government last year. The first of these, the Eu300 million Majadahonda hospital, should close in March, with most of the remainder expected to follow later in March and April. These first Spanish hospital PPPs are now being followed elsewhere in the country, with a preferred bidder announced for the Eu275 million Burgos Hospital earlier this year.

Ciudad Judicial de Barcelona y Hospitalet
Status: Closed 19 December 2005
Location: Barcelona, Spain
Total size: Eu320 million
Description: The design, build, finance and maintenance of administrative buildings for the regional administration, the Barcelona courts and Hospital de Llobregat
Sponsors: FCC, Ferrovial, OHL, Copisa and Emte
Debt: Eu287.6 million
Mandated lead arrangers: Banco Sabadell, Banco Santander
Monoline: XL Capital
Sponsor legal: Uria y Menéndez
Lender legal: Garrigues