HOCLAS
PPP/Real Estate Deal of the Year 2002
The Home Office Central London Accommodation Strategy (HOCLAS) project is the preferred shorthand for providing a solution to the UK Home Office's need for new offices. Its name reflects a deal that went through several incarnations, and a protracted negotiation process. At the same time it provides a useful template for further PFI real estate deals and settles, almost finally, the argument between bond and bank debt providers over funding the sector.
HOCLAS secured funding through an issue of £274 million in bonds by special purpose vehicle Anne's Gate Property Limited. Bookrunner Royal Bank of Canada, joined by Barclays Capital, split this into a standard £174 million inflation linked tranche and, more unusually, a £100 million bullet tranche, both wrapped by Ambac. The bonds, which closed at the end of March, reopened the market after a year-long hiatus.The Home Office originally went out to bidders to refurbish its existing Queen Anne's Gate site, presently in the hands of Land Securities under a long-term lease. The deal would have involved limited capital expenditure, and a certain level of facilities management. Indeed Land Securities was an initial bidder, but reportedly had little interest in the transaction beyond its potential for gaining further rent from the government while staff were moved during refurbishment.European Land, together with a bidding group comprised of Bouygues and Charterhouse (now HSBC Specialist Investments), put forward a scheme that involved a permanent move to new accommodation. This met with a sympathetic response, since the Home Office wanted a new layout for its offices, one that reflects current management and workplace thinking. Fortunately an appropriate site stood in the area near Whitehall, the former Department of the Environment offices at 2 Marsham Street.This relic of the sixties is described by those close to the deal as ?phenomenally ugly? and has now been demolished to make way for a new building designed by Sir Terry Farrell. The Home Office and Prison Service will move from five properties in London and Victoria into the new site and will transfer its lease on the former site to the Lord Chancellor's department, although cutting existing leases has been expensive.Bouygues owns Byhome, the property concern, and Ecovert, the FM contractor, and has, among other guarantees, provided a backstop for the £46 million loan to acquire the new site. This loan is to be repaid seven months after completion, the date of which Bouygues (responsible for construction) therefore guaranteed. The most significant aspect of the deal, however, is the residual value element of the financing. While this is often an issue on PFI projects where a building's useful life excludes its concession length, Anne's Gate's assumption was that the attractiveness of the building's site would leave an attractive rump of value that could reduce the unitary payments required of the government.However, residual value, and the ability to finance this through a bond issue, raises substantial intercreditor issues and risk factors even for the specialised class of investors attracted to such assets. The sponsors' eventual solution was to issue the £100 million in interest-only bonds, and add such enhancements as periodic reviews of the value of the property, a cash reserve that could be topped up should valuations fall short, and the fact that the residual value is set at £137.5 million. This does not eliminate all risk factors, but provided sufficient comfort to both Ambac and the investors.The contractual structure for the management is relatively simple, since beyond IT infrastructure, the facilities management aspect of the contract is not extremely complicated. Moreover, another clause, that sharing refinancing gains 50/50, went through without a protracted struggle. Royal Bank of Canada, the lead underwriter, brought in Barclays Capital to jointly run the Ambac-wrapped notes, which were launched to the capital markets on 20 March 2002. The £174 million amortising index-linked tranche, with a final maturity of March 2030, has an average life of 15.5 years. The notes carry a 3.237% coupon, for spread of 65bp over the 2.5%, 2016 index-linked gilt. The fixed-rate bullet tranche of £100 million was issued at the same time, and had a coupon of 5.661% for launch spread of 70bp over the 4.25%, 2032 fixed rate gilt and an issue price of 100.01%.These margins are tight, and, along with the issue from Ellenbrook earlier in the year, restored confidence in the long-dated index-linked markets for PFI paper. AAA spreads had reached as high as 185bp in 2000. Indeed, while the Ministry of Defence Headquarters deal opted for the bank market, sources close to the HOCLAS deal (which did briefly consider a bank financing) say that the debate over the merits of the two routes is all but over. A 65bp spread suggests that they are right.
Annes Gate Property Ltd.
Status: closed 26 March 2002
Size: £304 million
Location: London, UK
Description: £274 million bond issue backing construction of new headquarter buildings for the UK Home Office
Sponsors: HSBC Infrastructure and Bouygues
Debt: £174 million amortising index-linked issue with a final maturity in 2030 and a £100 million fixed-rate bullet tranche maturing in 2031
Bookrunners: Royal Bank of Canada and Barclays Capital
Insurer: Ambac
Consortium advisors: CIBC World Markets (Financial), Norton Rose (legal), Lambert Group (insurance),Terry Farrell & Partners (architect), DEGW (interiors and space planning), Pell Frischmann (structural engineering), Flack and Kurtz, Battle McCarthy (Mechanical and Electrical), Gardiner & Theobald (cost consultants), Montagu Evans, FPD Savills (Property).
Lenders' advisors: Allen & Overy (Legal), MottMacDonald (Technical), FPD Savills (Property), Marsh (Insurance) and Operis (Tax and Model).
Government advisors: Berwin Leighton Paisner (legal), PricewaterhouseCoopers (financial), Knight Frank (property), Willis (insurance), TTSP (architecture and space planning), Halcrow (facilities management), White Young Green (structural), Dunwoody (mechanical and electrical), Walfords (Quantity Surveyingand cost),
Relocation Information Services (relocation) and Partnerships UK (general PFI support).
The Home Office Central London Accommodation Strategy (HOCLAS) project is the preferred shorthand for providing a solution to the UK Home Office's need for new offices. Its name reflects a deal that went through several incarnations, and a protracted negotiation process. At the same time it provides a useful template for further PFI real estate deals and settles, almost finally, the argument between bond and bank debt providers over funding the sector.
HOCLAS secured funding through an issue of £274 million in bonds by special purpose vehicle Anne's Gate Property Limited. Bookrunner Royal Bank of Canada, joined by Barclays Capital, split this into a standard £174 million inflation linked tranche and, more unusually, a £100 million bullet tranche, both wrapped by Ambac. The bonds, which closed at the end of March, reopened the market after a year-long hiatus.The Home Office originally went out to bidders to refurbish its existing Queen Anne's Gate site, presently in the hands of Land Securities under a long-term lease. The deal would have involved limited capital expenditure, and a certain level of facilities management. Indeed Land Securities was an initial bidder, but reportedly had little interest in the transaction beyond its potential for gaining further rent from the government while staff were moved during refurbishment.European Land, together with a bidding group comprised of Bouygues and Charterhouse (now HSBC Specialist Investments), put forward a scheme that involved a permanent move to new accommodation. This met with a sympathetic response, since the Home Office wanted a new layout for its offices, one that reflects current management and workplace thinking. Fortunately an appropriate site stood in the area near Whitehall, the former Department of the Environment offices at 2 Marsham Street.This relic of the sixties is described by those close to the deal as ?phenomenally ugly? and has now been demolished to make way for a new building designed by Sir Terry Farrell. The Home Office and Prison Service will move from five properties in London and Victoria into the new site and will transfer its lease on the former site to the Lord Chancellor's department, although cutting existing leases has been expensive.Bouygues owns Byhome, the property concern, and Ecovert, the FM contractor, and has, among other guarantees, provided a backstop for the £46 million loan to acquire the new site. This loan is to be repaid seven months after completion, the date of which Bouygues (responsible for construction) therefore guaranteed. The most significant aspect of the deal, however, is the residual value element of the financing. While this is often an issue on PFI projects where a building's useful life excludes its concession length, Anne's Gate's assumption was that the attractiveness of the building's site would leave an attractive rump of value that could reduce the unitary payments required of the government.However, residual value, and the ability to finance this through a bond issue, raises substantial intercreditor issues and risk factors even for the specialised class of investors attracted to such assets. The sponsors' eventual solution was to issue the £100 million in interest-only bonds, and add such enhancements as periodic reviews of the value of the property, a cash reserve that could be topped up should valuations fall short, and the fact that the residual value is set at £137.5 million. This does not eliminate all risk factors, but provided sufficient comfort to both Ambac and the investors.The contractual structure for the management is relatively simple, since beyond IT infrastructure, the facilities management aspect of the contract is not extremely complicated. Moreover, another clause, that sharing refinancing gains 50/50, went through without a protracted struggle. Royal Bank of Canada, the lead underwriter, brought in Barclays Capital to jointly run the Ambac-wrapped notes, which were launched to the capital markets on 20 March 2002. The £174 million amortising index-linked tranche, with a final maturity of March 2030, has an average life of 15.5 years. The notes carry a 3.237% coupon, for spread of 65bp over the 2.5%, 2016 index-linked gilt. The fixed-rate bullet tranche of £100 million was issued at the same time, and had a coupon of 5.661% for launch spread of 70bp over the 4.25%, 2032 fixed rate gilt and an issue price of 100.01%.These margins are tight, and, along with the issue from Ellenbrook earlier in the year, restored confidence in the long-dated index-linked markets for PFI paper. AAA spreads had reached as high as 185bp in 2000. Indeed, while the Ministry of Defence Headquarters deal opted for the bank market, sources close to the HOCLAS deal (which did briefly consider a bank financing) say that the debate over the merits of the two routes is all but over. A 65bp spread suggests that they are right.
Annes Gate Property Ltd.
Status: closed 26 March 2002
Size: £304 million
Location: London, UK
Description: £274 million bond issue backing construction of new headquarter buildings for the UK Home Office
Sponsors: HSBC Infrastructure and Bouygues
Debt: £174 million amortising index-linked issue with a final maturity in 2030 and a £100 million fixed-rate bullet tranche maturing in 2031
Bookrunners: Royal Bank of Canada and Barclays Capital
Insurer: Ambac
Consortium advisors: CIBC World Markets (Financial), Norton Rose (legal), Lambert Group (insurance),Terry Farrell & Partners (architect), DEGW (interiors and space planning), Pell Frischmann (structural engineering), Flack and Kurtz, Battle McCarthy (Mechanical and Electrical), Gardiner & Theobald (cost consultants), Montagu Evans, FPD Savills (Property).
Lenders' advisors: Allen & Overy (Legal), MottMacDonald (Technical), FPD Savills (Property), Marsh (Insurance) and Operis (Tax and Model).
Government advisors: Berwin Leighton Paisner (legal), PricewaterhouseCoopers (financial), Knight Frank (property), Willis (insurance), TTSP (architecture and space planning), Halcrow (facilities management), White Young Green (structural), Dunwoody (mechanical and electrical), Walfords (Quantity Surveyingand cost),
Relocation Information Services (relocation) and Partnerships UK (general PFI support).
Request a Demo
Interested in IJGlobal? Request a demo to discuss a trial with a member of our team. Talk to the team to explore the value of our asset and transaction databases, our market-leading news, league tables and much more.