The biggest Canadian infrastructure financing of last year, the C$1.895 billion ($1.65 billion) Richmond Airport Vancouver Rapid Transit Project (RAV) achieved a 100% hit ratio when it went to the bank market in mid-2005 for C$600 million of project debt.

Despite the bank take up, RAV was not an easy deal to price. Although there have been a number of P3 (public-private-partnership) deals in the Canadian roads sector, RAV – now known as Canada Line – is the first P3 financed in the Canadian rail market. Consequently, lenders and lead arrangers were benchmarking against the established European rail sector and adding a small premium for a market as yet untested.

That pricing policy fed into the syndication strategy with the lead arrangers – SG, NordLB and Bank of Ireland – syndicating the debt simultaneously in New York and London to ensure a strong European bank take up. The mix of banks that subsequently participated – AIB, Bayerische LB, Calyon, Commonwealth Bank of Australia, Depfa, Dexia, Fortis KfW-IPEX, Lloyds, Mizuho, Natexis, RBC, RBS and Scotia Bank – mirrors the success of that strategy.

RAV began with initial feasibility studies in April 2002 and by March 2004 two consortia were at final bidding stage. But in May 2004, the project looked in jeopardy when concession grantor Translink (the Greater Vancouver Transport Authority (GVTA)) pulled the plug due to cost concerns. In July, after looking at alternatives without private funding, and changes to the concession that shaved costs, Translink re-approved the project.

An SNC-Lavalin-led consortium – InTransitBC – was awarded the 35-year DBFO concession in November 2004. SNC-Lavalin is sole EPC contractor, and the EPC C$1.6 billion contract – as agreed between RAVCo (the public sector counterparty formed to oversee the project) and InTransitBC – is final, fixed-price and date-certain. Consequently, any cost overruns will be the responsibility of InTransitBC.

Born of political support for the Vancouver 2010 Winter Olympics – which the project will service – RAV is an 18.3km light rail system connecting Richmond with downtown Vancouver and Vancouver International Airport.
Ridership is estimated at around 100,000 passengers per day and 20 million per year when RAV is complete in 2009. Around 3.7 million passengers are also expected to travel to the airport each year using the new transit line. Once completed, TransLink will own the line and set the fares.

The line will cost C$1.845 billion of which C$120 million is equity, C$600 million is commercial debt and C$1.175 billion is various forms of government funding for GVTA/RAVCo: C$421 million comes from the Federal Government of Canada, C$235 million from the Province of British Columbia (C$152 million of BC's contribution will be recovered by InTransitBC through performance payments during the operating period and together with a contingency, the province's total contribution is $435 million), C$303 million from the GVTA, C$223 million from Vancouver International Airport Authority (VIAA) for the airport line, and C$48 million from VIAA for common costs.

The government money is all contributed as grants with each slice dedicated to a particular part of the project. The public sector will make 90% of payments to the project based on reliability safety and availability, and 10% based on ridership volume.

The C$600 million commercial debt priced at 115bp over CDOR during construction dropping to 105bp post-completion, and then rising to 125bp over the 28-year tenor – leaving a tail of seven years on the 35-year concession.

Syndication closed in November 2005 with the following co-arrangers joining the leads as co-arrangers: Allied Irish Banks, Calyon, Depfa, Fortis, Lloyds TSB, Natexis, RBS, BayernLB, Commonwealth Bank of Australia, Dexia, KfW-Ipex Bank, Mizuho, Royal Bank of Canada and Bank of Nova Scotia.

Lenders have the comfort of a sponsor with a strong track record, only 10% ridership risk and a strong counterparty in Aa3 rated GVTA/Translink. The deal also features rectification milestones that limit the sponsors' liability for project faults to the immediate fault and not the fault plus damages.

The norm during construction is that payments to the project company are made according to a milestone regime. The RAV construction period is split into 1,000 milestones and partial milestones with a pre-assigned value, and at the end of each month a certificate of completion is redeemable for work complete.

Just over 100 of these milestones are rectification milestones. These rectification milestones provide a guaranteed stop-loss or creeping insurance throughout the construction period. Consequently, if an element of the project has been built and passed a rectification milestone, and the project is subsequently terminated and that element is faulty, any claim for compensation from the state cannot take into account additional damage caused by the fault.

The RAV value-for-money report – expected in December 2005 – has been pushed back to February 2006. The project still has its sceptics, but the recent costs report on the Sea-to-Sky project (a similar deal in the Canadian roads sector), while not flattering of the private sector, was also not scathing. Furthermore, benchmarked against European rail PPP, RAV commercial debt is very competitive.

RAV (Canada Line)
Status: Syndication closed 15 November 2005
Description: Financing for first Canadian rail PPP
Sponsors: SNC-Lavalin; British Columbia Investment Management Corporation (BcIMC); Caisse de Depot et Placement du Quebec
Mandated lead arrangers: Bank of Ireland; NordLB; SG
Financial advisers to the Province: PwC
Sponsor counsel: Davis & Company
Lender counsel: Cameron McKenna; Davies Ward Phillips & Vineberg
Government counsel: Bull Housser & Tupper
EPC contractor: SNC-Lavalin
Independent engineer: RW Beck
Translink business adviser: PwC
Business adviser to the Province: Partnerships BC
Model auditor: Ernst & Young