Since senior syndication was launched in June this year, some 30 banks have joined lead arrangers BNP Paribas, CIBC and HSBC to finance the Skynet 5 deal, the Ministry of Defence's largest PFI project to date. Review of documentation is underway and signing is expected within weeks.

This project marks the first time that secure global military satellite communications (milsatcoms) will be delivered to the UK armed forces in the form of a service provision contract. Worth about £1.6 billion over the 15-year concession period, Skynet 5 calls for the project company, Paradigm Secure Communications, to deliver milsatcoms to the UK armed forces - this involves taking over the ownership and operation of the existing Skynet 4 project and incorporating two new Skynet 5 satellites and associated ground segment from 2005, with the full service available by 2008.

The SPV, Paradigm Secure Communications (PSC), is wholly owned by the European Aeronautic Defence & Space Co (EADS). PSC has contracted Astrium, a division of EADs and Europe's leading space company, to develop the satellite technology for Skynet 5, having already developed the Skynet 4 series for the Ministry of Defence. EADS bought out BAE's 25% share in Astrium in May this year, and is now the sole shareholder in the company. Paradigm Services, also a division of EADS has been contracted for full service delivery.

The financing has apparently proved a huge success with the deal pulling in an oversubscription of 300%. The firm interest is attributed to the strength of the deal structure. Strong support in the deal structure from EADS is also believed to be one of the main reasons for the success. Although the Ministry of Defence has not formally guaranteed the debt, most lenders would see its presence as a comfort. The fact that there have been few syndications in the bank market for well-structured projects of this size (with many recent large projects financed through a bond issue) is another reason that has been given for the deal's success.

BNP Paribas, CIBC and HSBC are arranging the £963 million of debt and approached a wide range of banks to come in as subunderwriters. The hit rate was 'phenomenally high' with the majority of active banks in the PFI market having come in on the deal. The deal has also attracted EADS' relationship banks (such as Citigroup and ANZ), some of which have not heavily invested in PFI projects.

The oversubscription on the deal suggests that the decision to drop the wrapped bond tranche on the deal and fund it on bank debt alone was well informed. "Bank loans often offer more certainty of funding, which one doesn't get with a bond especially under current market conditions, and provide increased flexibility in the structure, which was important in this deal," remarks one banker. Financing comprises a £880 million 14-year term loan and a £83 million 13½-year term loan. The second credit facility is for third party sales and can be resized accordingly. The project will be funded through payment revenues from the Ministry of Defence through a take-or-pay type agreement. The sponsor will be able to offer excess capacity to third parties, such as Nato and certain nation states. Lead arrangers were originally offered tickets of £100 million and the subunderwriters £80 million tickets. Pricing ranges from 90bp to 120bp over Libor. As a result of the oversubscription, final offers will, however, be substantially lower.

Because of the nature of the assets the structure of the deal was complicated and much time had to be taken to get the banks to get comfortable with the structure and understand the risks. As it is not possible to repossess a satellite, the sponsor had to take some risk pre-completion and the MoD has taken some risk post-completion. As a result technology risk has been largely eliminated and, judging by the market response, it has been adequately dealt with from the banks' perspective. Further details of the risk-sharing agreement should become available once the deal has been signed. The deal is shorter than what the UK PFI market is used to, with tenors averaging between 20 and 30 years for a road or rail PFI. The tenor reportedly relates to the risk allocation profile.

Opting for a PFI solution, the MOD retains guaranteed, secure milsatcoms, benefits from evolving technologies and increasing capacity and at the same time eliminates the risks of managing the space system. Value for money benefits are achieved through sale to other potential users, efficiency of system procurement and risk transfer.

Paradigm has said its hopes that this contract will open a whole new market, allowing the company to offer milsatcoms to countries that may previously have been unable to acquire these capabilities due to the prohibitive costs involved and to investigate the possibility of providing a pan-European solution for military satellite communications.

This project has been under development since 1999 when two competitive PPP design phase contracts, worth £30 million each, were awarded to the industry. The design phase contracts were completed in November 2000 and fully costed PFI proposals from both companies were submitted in January 2001. Paradigm Secure Communications was selected preferred bidder in February 2002 over rival consortium Rosetta, led by Lockheed-Martin, British Telecom and British Aerospace.

Paradigm Secure Communications

Status: Senior syndication launched 18 June 2003, documentation under review.

Size: £1.6 billion

Description: Largest MoD project to date to operate existing Skynet 4 satellite network, upgrade it and launch the Skynet 5 system.

Concession awarder: Ministry of Defence

Concession: 15 years

Sponsors: Astrium, Cable and Wireless, Cognet DSN, General Dynamics Decision Systems, Logica, SEA and Serco

Project debt: £963 million

Lead arrangers: BNP Paribas, CIBC World Markets and HSBC (Contacts)

Financial advisor to MoD:

Deloitte & Touche

Financial advisor to sponsor: Citigroup

Technical advisor to lenders: Mott MacDonald

Insurance advisor to the lenders: Marsh

Insurance advisor to the sponsor: Willis

Legal counsel to sponsor: Freshfields

Legal counsel to lenders: Allen & Overy

Legal counsel to concession awarder: Burges Salmon