The close of the Sea-to-Sky syndication has signalled that banks – in particular the Europeans based in New York – are warming to the Canadian public-private partnership (P3) market.

Until this year the market was dominated by one asset class (hospitals) and presented opportunity only to those foreign banks with an equity platform (Macquarie and ABN Amro, for example), as well as Canada's institutions, which provided most of the debt.

Four of the first five P3 deals to close were for hospital projects – and the fifth, Sierra Yoyo Desan, was a highly bespoke road concession. Of the four hospital deals, two were financed under ABN Amro's infrastructure capital model, while the other two were Borealis-led concessions in Ontario financed through CIT-led private placements.

Now, a shift in the type of asset looking for financing, as well as a concerted effort on the part of government, has opened up the P3 market to an influx of new lenders.

BC brings it on

British Columbia has pulled away from the other provinces in terms of deal flow. Ontario's government remains deeply ambivalent about P3 and Alberta has closed only one substantial financing – the ABN-led Edmonton ring-road. British Columbia has benefited not only from the consistent support of the Liberal party, but also from a much more subdued tone in public debate than Ontario.

This year there have been three transport projects financed in British Columbia – the Sea-to-Sky Highway, the Okanagan Crossing, and the Richmond-Airport-Vancouver (RAV) rail project. Two of them – Okanagan and RAV – have SNC-Lavalin as a lead sponsor, and two of them – RAV and Sea-to-Sky (S2S) – have gone through the bank market.

The RAV rail project closed on 29 July, and featured C$600 million ($493 million) in bank debt from Bank of Ireland, Nord/LB and SG. It is currently in syndication, and will do well to replicate the success of S2S, which attracted very strong interest from bank lenders. Moreover, the pricing on S2S, at roughly 110bp over the CDOR, is highly competitive with institutional debt.

Sea-to-Sky is a PPP design-build finance maintain concession for a stretch of road between Vancouver, the largest city in the province, and Whistler, a ski resort that will be home to the 2010 Winter Olympics. The 125km route will be repaired, widened in some places, and the operator, a Macquarie-led consortium, will be repaid according to availability payments, as well as a small element of traffic-related revenue.

The arrangers – RBS and SG – wrapped up the sale of the project's C$498 million debt in August after an extremely positive response. Macquarie is providing all of the equity for the project, while among the section's contractors are Peter Kiewit Sons, JJM Construction, Hatch Mott MacDonald, ND Lea, McElhanney Engineering and Capilano Highway Services.

Whistler's worthwhile work

The project company, S2S Transportation, will be responsible for upgrading 13 discrete sections of the highway, which will each need to be brought to completion according to a set schedule. The concession has a length of 25 years – 20 years plus construction. The British Columbia Ministry of Transportation is the concession awarder, advised by Partnerships British Columbia, which is not only financial adviser, but essentially guides the province in the development of P3 projects.

The road will be rehabilitated in several separate sections, of which some have already benefited from work undertaken by the province. According to Richard Fyfe, who was part of the province's team for Sea-to-Sky, and now works in the attorney-general's office, "one key consideration in using a P3 structure was the size of the concession. We structured the concession to focus on three key areas – safety, reliability and traffic management."

The province began preparing a business case towards the end of 2003, asked for registration of expressions of interest at the start of 2004, and solicited comments on the draft of the concession before issuing a formal request for proposals in December 2004. Most of the criticism from potential sponsors and lenders centred on security issues and step-in rights.

The sponsors that bid for the concession were required to put forward a proposal with a financing plan attached, and were thus committed to a particular financing route. The sponsor has been unable to elaborate on its reasons for choosing the bank route, citing the province's desire to keep details of the financing secret until a detailed value for money report is released.

The details that emerged during syndication looked broadly promising from the government's point of view. The deal priced at 110bp over the CDOR during construction, 100bp during years 1-10, 110bp for years 10-15, and then 120bp for the remainder of the deal's 24.5-year tenor. The deal was, according to sources familiar with the process, roughly twice oversubscribed.

According to Larry Blain, CEO of Partnerships BC, "all of our deals have introduced new participants to the Canadian market, and we've tried to make it as easy as possible for them to enter this market." Blain notes that European banks tend to be very careful about having all terms defined, and says that the Sea-to-Sky documentation was three times the length of some other Canadian P3 projects.

According to Blain, the reason for the recent preponderance of bank deals has more to do with the order in which assets came up for financing, as well as the requirement from the provinces that bidders provide committed financing.

"All we cared about was getting as much competition as possible. I always thought that the Canadian banks would find it difficult, but imagined that there would be interest from the pension funds." The pricing bears this out, although according to Blain "we're not concerned so much with spread as getting project credits into the mid-range, roughly from triple B to single-A, which indicates that there's been respectable risk transfer."

Swaps and costs

But probably the biggest, and certainly the most sensitive, challenge facing bank market deals, has been the use of swaps from floating to fixed rate. Canada's interest rate swap market is relatively illiquid, and it has been difficult for sponsors to price these accurately and competitively. This has been one factor in the government's desire to avoid discussing Sea-to-Sky's financing before the production of a value for money report.

According to several players active in the market, sponsors are faced with a choice of working with a Canadian counterparty, which might offer a cheaper base swap rate, but a higher credit-related element, and a foreign bank, which would have a more expensive base swap. The reason for this disparity is that foreign counterparties, unlike Canadian ones, do not have to mark their exposure to market.

However, the province stresses that it gets value for money regardless of the financing market. Says Blain, "all of the deals we've done have to go up against the risk register, and Abbotsford and Sea-to-Sky have both been the subject of the auditor-general's review of our value for money report." Still, BC is still likely to address the swap issue by insisting on a funding competition between the bonds and bank debt.

But the province still has to deal with a vocal group of PPP opponents that want to compare the cost of P3 debt with the cost at which the province can borrow. Such groups would likely take issue with the cost of the swaps, as well as the potential for a bank to profit when rolling these over.

According to Blain, however, such comparisons are too blunt. "I still hear this [the comparison between sovereign and P3 costs] quite often," says Blain. "But we make sure that we make the right value for money assessments, although we're using a risk transfer model that is so complex only a few people at the provinces understand the ins and outs of it."

New entrants and roles

The government might have made patchy progress in winning over public opinion, but the most conspicuous change in attitude has been on the part of the Canadian banks. While there has been no widespread entry into the market on the part of domestic banks, they have quietly moved into some secondary roles. Earlier this year, RBC bought out the debt associated with ABN Amro's hospital projects, and then sold it on to its network of institutional buyers.

The trade illustrates the continued relevance of the big five locals to the market, that given the breadth of their distribution they can still offer small advantages in pricing. Moreover, if there is a move towards a greater participation by Canadian sponsors, which frequently lean upon Canadian banks for advice, then their presence will be more marked.

The most intriguing new entrant, however, is Australian developer Plenary Group. Plenary is a familiar name from the Australian market, where it began life as the vehicle for the pioneers of ABN Amro's infrastructure capital model. Deutsche Bank has a 20% stake in Plenary, and also provides the necessary placement capabilities. Three of ABN's team in Canada, led by Paul Dunstan, moved over to Plenary in July. They will likely feature in the bidding groups for several new concessions, again with backing from Deutsche, which has not until now been very active in Canadian PPP (although it had a small piece of CIT's hospital financings in Ontario), but has a strong UK track record.

According to Dunstan, managing director of Plenary's Canadian business, "we'll be trying to do the same as we did at ABN Amro, which is to provide equity to, and control, PPP assets." Plenary's move probably also speaks to the confusion at ABN Amro over the future of its infrastructure capital business. Since Dunstan's move. Babcock & Brown recently poached much of the rest of the ABN's infrastructure leadership in Sydney, and is a likely future competitor in Canada.

RAV rumbles in

The most recent financial close, however, demonstrates the need in the Canadian market for non-financial bidders. The RAV's sponsors are SNC-Lavalin, British Columbia Investment Management Corporation (bcIMC) and the Caisse de dépôt et placement du Québec (CDPQ). They were named preferred bidder over the RAVXpress consortium (Bombardier/AMEC/Bouygues/Bilfinger Berger) in November 2004, and mandated the three lead arrangers shortly afterwards.

RAV was the first bank deal, and the first non-hospital deal, to mandate. But its size, and the sheer number of government agencies and funding partners involved, as well as the technical challenges involved with a light rail project, meant that it took longer to come to market. The concession is for 35 years from the signing of the concession.

Of the project's total cost, C$120 million is in equity, C$600 million in debt, C$421 million comes from the federal government of Canada, C$235 million from the Province of British Columbia, 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 in the form of grants, although each slice is dedicated to a particular part of the project. RAVCo, the public sector counterparty formed to oversee the RAV PPP, has signed a contract that makes the project company responsible for constructing, operating and maintaining the entire project. The public sector will make payments to the province based on reliability safety and availability. There will, as in Sea-to-Sky be a component of 10 -15% based on volume, which roughly corresponds to the proportion of equity to be provided.

RAV is also, like the Okanagan Bridge financing before it (search 'Okanagan' for details), highly reliant on the credit of SNC-Lavalin. SNC is providing all of the equity, is the sole engineering procurement and construction (EPC) contractor, and is the only named operations and maintenance contractor. Serco, which had originally been a bidder alongside SNC, does not yet have a formalized role, although it may come in at a later date as a subcontractor.

The three lead arrangers are currently in the process of putting together an information memorandum, and will syndicate the debt shortly. This process will coincide with the firming up of the relevant subcontracts, including those for rolling stock and other services. The biggest challenge will be the tenor of the debt, which at 28 years exceeds Sea-to-Sky. Sources close to the deal say that the pricing is competitive with that of Sea-to-Sky, although given the longer tenor and the deal's complexity, this could suggest a fairly high mark-up.

The pack still lagging

British Columbia has not yet reached the stage where it can commoditise its deals. But the time that it has taken to develop a streamlined PPP model reflects as much the politically decentralised Canadian political system, and tensions between different capital providers as any innate flaws in the process. Coming up are the Golden Ears bridge, a new structure connecting Maple Ridge and Pitt Meadows, and the Surrey and Langley, for which an RFP from GVTA is out, and Kicking Horse Canyon, a bridge and highway improvement project.

Alberta has yet to follow up the Anthony Henday road P3, which ABN Amro closed in January. But Henday, (also known as Edmonton Ring Road) was an impressive start, and the last deal closed by ABN's infrastructure capital team. The C$285 million debt financing backed a construction contract with PCL, which has worked previously with ABN, as well as an operations contract with Transportation Systems Management.

The counterparty on the deal, providing largely availability-based payments, is Alberta's AAA/Aaa-rated Infrastructure and Transportation Department. Moody's rated the C$149 million Series A tranche, which takes the form of fully amortising annuity bonds due 2037, at Aa3. The financing also features a $136.1 million Series B issue.

Meanwhile, Ontario looks like reversing some of its earlier hostility towards the P3 process, even though it remains highly averse to the term. While Ontario is, in terms of population and economy, the most promising place for P3 development, the Liberal administration ended plans to proceed with further PPPs, and set the Public Infrastructure Renewal (PIR) ministry which has as its mission the use of sovereign borrowing and procurement processes.

That stance changed with the release in June of the ReNew Ontario plan, which included C$2.3 billion in private sector opportunities among the C$30 billion in public works projects. The process by which the government will court the private sector is known as alternative procurement financing and differs in its particulars little from P3 structures. However, as one observer notes, "many of the projects that the government has already earmarked for the APF treatment have substantially all of their design work in place."

The PIR has issued an RFP to three bidding groups for the Durham Courthouse project, and has attracted several long-term financial equity providers:
• SNC-Lavalin, Bondfield Construction and ProFac Facilities Management.
• Durham Courthouse Centre Corporation, featuring of EllisDon, LPF Realty (owned 100% by Labourers' Pension Fund of Central and Eastern Ontario), CIBC World Markets and Carillion Canada.
• Access Justice Durham, led by ABN Amro, and including PCL Constructors and Johnson Controls.
The RFP covers a 50,000-square-foot consolidated courthouse for the Region of Durham, It avoids mention of the financing for the project, the RFQ referred to a contract to finance, design, build and manage the facility, and this stage of the RFP covers only the design of the facility. However, the province's ultimate plans for the process have yet to be determined. As recent financings have demonstrated, however, neither government wariness, nor political pressure, have dampened lender and sponsor enthusiasm for the process.

S2S Transportation
Status: Closed May 2005, syndicated August 2005
Size: C$600 million
Location: Vancouver-Whistler, British Columbia
Description: 125km PPP road concession
Sponsor: Macquarie Essential Assets Partnership
Debt: C$498 million
Tenor: 24-5 years
Margin: 100bp to 120 bp over the CDOR
Sponsor financial adviser: Macquarie North America
Lender legal: Lovells
Sponsor legal: Blake Cassels & Graydon
Government legal: Frasner Milner Casgrain
Government business process adviser: KPMG
Government financial: Ernst & Young
Owner's engineer: SNC-Lavalin
Consultant: Nossaman Infrastructure
Government procurement manager: CH2M Hill

InTransitBC
Status: Closed 29 August 2005, syndication imminent
Size: C$1.647 billion
Location: British Columbia
Description: Light rail link between Vancouver, Richmond and Vancouver Airport
Sponsors: SNC-Lavalin, British Columbia Investment Management Corporation (bcIMC) and the Caisse de dépôt et placement du Québec (CDPQ)
Debt: C$600 million
Arrangers: Bank of Ireland, Nord/LB and SG
Tenor: 28 years
Independent engineer: RW Beck with Hatch Mott MacDonald
Lender legal: CMS Cameron McKenna (international), Davies Ward Phillips & Vineberg (local)
Sponsor legal: Davis & Co
Government legal: Bull Housser & Tupper
Translink business adviser: PwC
Provincial business adviser: Partnerships BC
Model auditor: Ernst & Young

Okanagan Lake Concession LP
Status: Closed 29 June 2005
Size: $144 million
Location: Kelowna, British Columbia
Description: P3 financing of floating bridge
Sponsor: SNC-Lavalin
Debt: $157 million
Administrative agent: Sun Life
Financial advisers: SNC-Lavalin Capital, Depfa Bank, Nord/LB