2003's largest deal - Metronet - is the state of the art both for the private finance market in the UK and for PPP development in general. Its gargantuan debt requirement - £2.65 billion ($4.5 billion) - forced the sponsors and their arrangers into all corners of the project debt market and resulted in a number of firsts and innovations.

Metronet's financing is also the culmination of one of the most politically contentious elements of the public-private partnership programme in the UK. While some schemes, particularly those for the UK's National Health Service, have been locally unpopular, Metronet, as well as its companion project Tubelines, have been unique in confronting opposition from an elected official - London mayor Ken Livingstone.

Probably the highlight of the deal is the flexibility built into the fabric of the agreement between London Underground (LUL, the client) and Metronet.

The two sides have the ability to reprice the contract after 7.5 years, using a statutory arbiter, a figure, the arrangers point out, that is not a regulator. It also features a contract with Bombardier for trains and signalling equipment that runs to 2017.

The Metronet financing backs the operations of two concessions, each with three lines. Metronet BCV covers the Bakerloo, Central and Victoria lines. Metronet SSL will run the sub-surface lines - District, Circle, Metropolitan, Hammersmith and City and East London. The remainder of the lines will be the responsibility of the Tubelines consortium, which was able to raise financing before the end of 2002.

Metronet, which needed to raise £8.5 billion to fund the two concessions, had to use a larger number of funding sources, was unlikely to have them all lined up within this ambitious timeframe. Metronet's owners, each with a £70 million, 20% stake, are Bombardier Transportation UK, WS Atkins, Balfour Beatty, Seeboard and Thames Water. It had won both of the two concessions by September 2001, after the government decided that two sets of bidders would make for the most effective negotiating progress.

The contract does not involve the transfer of assets to the private sector, and so deserves to be seen more as a structured project financing than asset-backed securities to which UK PFI is often compared. In part this is because lenders are largely reliant on the availability and performance payments from LUL, part of Transport For London (TfL).

Central government, rather than TfL, underpins the deal's credit. The UK Department of Transport sets the grant level for TfL, and provides 50% of its funding. The remainder comes from operations, and is of more concern to lenders. TfL carries a rating of AA from Standard & Poor's, but none from Moody's.

But the biggest means of reassuring the monolines and lenders is the comfort letter from the UK government. This covers 95% of the of the cashflow risk on the financing, and has been structured to reconcile the twin issues of the UK government's debt burden and the nervousness of banks and investors after Railtrack's collapse.

The comfort letter does not count as a guarantee, and therefore keeps the debt off the government's books.

But it says that if LUL could not meet its commitments under the PPP it would be inconceivable that the Secretary of State would not intervene to raise the grant to a level that would cover the relevant cashflow.

Behind this assurance lies the need by the government and, according to recent press reports, possibly TfL, to raise money for further projects. By locking the ratings agencies and monolines into accepting the letter, it also conceivably puts the UK government's rating, and therefore borrowing costs, on the line.

The 29-year bonds' bookrunners (RBS, Deutsche and UBS) and the 27.5-year debt's arrangers (Deutsche Bank, CIBC World Markets, Royal Bank of Scotland and Abbey National) can point to the success of the respective sales as proof that the deal is no Railtrack. Certainly, the EIB backed the deal enthusiastically, to the tune of £600 million.

The bank debt breaks down into a £660 million main facility, a £230 million liquidity facility and a £130 million protected costs facility. This debt is priced at 145bp up to year four, and 160bp thereafter, slightly inside that achieved by Tubelines. It brought in slightly fewer arrangers and co-arrangers than its predecessor: Banca Opi, Bayerische Landesbank, CDC Ixis, Bank of Ireland, Credit Agricole, Dexia, Depfa, HVB, ING, KBC WestLB, KfW and NIB Capital are arrangers and Helaba and NordLB are co-arrangers.

The debt, and the facilities, are split between the two operating companies.

The bonds used two monolines - FSA and Ambac - as wrappers, to maximize the level of cover available. Metronet SSL issued £165 million of index-linked bonds, guaranteed by Ambac, and £350 million of fixed-rate bonds backed by FSA. Metronet BCV issued £165 million of index-linked bonds guaranteed by FSA and £350 million of fixed-rated bonds backed by Ambac. The average life on the SLL bonds is 20 years and on the BCV paper 22.5 years.

The final pricing came out at 73bp over Libor for the £350 million fixed rate paper and 80bp for the index linked - the coupons were 5.3% and 2.8% respectively.

Metronet, while impressive, does not look like creating much of a precedent for future PPP deals however, since the size is unprecedented and the contract with LUL is bespoke.

Metronet BCV and SSL

Status: closed April 2003

Description: second London Underground PPP concession comprising bond and bank debt financing

Concession period: 30 years

Concession awarder: London Underground

Sponsors: Metronet (comprising Bombardier Transportation UK; WS Atkins; Balfour Beatty; Seeboard; Thames Water)

Total debt: £2.65 billion

Bank debt: £1 billion

Lead arrangers: Deutsche Bank, CIBC World Markets, Royal Bank of Scotland and Abbey National

Arrangers: Banca Opi; Bayerische Landesbank; CDC Ixis; Bank of Ireland; Credit Agricole; Dexia; Depfa; HypoVereinsbank; ING; KBC; WestLB; KfW; NIB Capital

Co-arrangers: Helaba; NordLB.

Bond debt: £1.05 billion

Lead managers: Deutsche Bank; Royal Bank of Scotland; UBS Warburg

Monoline bond wraps: FSA; Ambac

EIB debt: £600 million

Lawyers to the sponsors: CMS Cameron McKenna

Lawyers to the lenders: Ashurst Morris Crisp

Lawyers to the concession awarder: Freshfields Bruckhaus Deringer

Independent technical advisory: Jacobs Gibb

Insurance: Marsh

Tax and accounting consultant, and model auditor:

Deloitte and Touche