GCHQ: wrapper's delight
The Government Communications Head Quarters (GCHQ) deal (closed 22
June) tested PFI bond market appetite to unprecedented levels ? and
bondholders do not even know what goes on inside the building they
have paid for.
The £398 million ($617 million) placement carries a wrap from Financial Security Assurance (FSA), a further sign of the monolines' strengthening grip on the market. With UK spreads increasing, the triple-A policy is the only certain way to shift large volumes of paper.
GCHQ is a design-build-finance-operate (DBFO) contract to create new office accommodation for the government's intelligence interceptions service. Even more than the recent ministry (defence and finance) deals, it is a radical shift from the schools, roads and hospitals that make up the bulk of PFI deal flow. And the placement is estimated at three times the size of the previous largest deal in the sector.
The UK government's desire to bring about an improvement in facilities is well documented. The buildings, located at Cheltenham in Gloucestershire, date back up to 50 years. The new building merits the tag ?stadium-size? and contains all of the sophisticated electronic infrastructure necessary to carry out the UK government's eavesdropping activities.
The preferred bidder on the contract was announced in October 1998, with a consortium comprising construction firm Tarmac (later demerged construction arm Carillion (40%)), security firm Group 4 Securitas (40%) and incumbent UK telco BT (20%) selected to carry out the contract. All of the sponsors, who formed contract company Integrated Accommodation Services, have experience in PFI, whether in prisons, communications or construction. The security and secrecy surrounding the project have perhaps been overstated, but little was heard on the project between the start of 1999 ? when Deutsche were appointed in a debt providing capacity ? and the start of the year, when rumours of a bond financing began to emerge.
The delay probably has as much to do with creating an optimal risk sharing deal as any suggestion of pre-nuptial nerves on the part of the Foreign and Commonwealth Office. Given the circle through which any project documentation would have had to go, the added reports required to reach out to bond investors would not have created any more concern than was already evident.
And GCHQ is a unique asset, one, according to the psychology of those involved in the deal, that the government could not afford to see fail. Some of the structures of the contract are reasonably familiar from hospital deals, for instance the acceptance that the concessionaires should not involve themselves with front-line activity. Other features, such as the requirement of security clearance for personnel, are more novel.
The requirement is important since the most daring move on the part of the concession awarders has been to make Group 4 responsible for physical site security. This process will involve the transfer of a number of staff to the private sector, but clearance and results still largely rest with the government.
Political risk is another aspect that becomes more important with an asset of this type, since with PFI projects this is usually confined to an assessment of government commitment to the initiative. Other factors, such as terrorist attack, must be taken into account. And the cost reflects a much higher standard of build required for the facility's secretive new occupants.
The design, whilst capable of wowing the domestic press, does use proven technology and includes added protections to ensure structural integrity over the life of the asset. The building can be assembled in sections, meaning that construction risk is lowered after the initial foundations are laid on-site. BT, acting as a subcontractor, will be responsible for some of the non-critical communications infrastructure, including phones and laptops.
Government unitary payments cover the debt service, and are made up of a fixed and an index-linked element. The fixed element alone is enough to cover senior debt service 1.9x, although this element is not inflation-proof. The first element is designed to mirror initial construction costs, with the RPI element covering life-cycle maintenance costs.
Much of the mitigation of the risks associated with penalty deductions (for such events as security lapses or unavailability) has been passed on to subcontractors, usually other parts of the sponsors' businesses, or by the issuing of performance bonds. One of £80 million has been taken out with St Paul International Insurance, and Group 4's FM obligations are covered by an £11 million termination bond from ABN Amro. However, post completion the proceeds of land sales on the old site, for which Alfed McAlpine has already agreed to act as a purchaser, which could amount to roughly £2.2 million.
In common with most PFI deals, the structure is highly leveraged, with sponsors putting in just £55,000 of pure equity, with the remainder of their commitments coming in the form of £22 million of subordinated debt, only paid in after completion. A further £22 million of mezzanine bonds, believed to have been subscribed to by Abbey National, complete the capital structure.
Deutsche Bank placed the senior bonds to a group of around 30 institutional investors, largely in the pensions and insurance sectors. The bonds were priced at 180bp over the 2021 Gilt, higher than initial talk putting the bonds within the 165-175bp range, but below the 185bp that Baglan Moor ended up at in May. One reason for this might be the project's strong underlying rating, put at Baa1 by Moody's Investors Service and Standard & Poor's are believed to have given it a PFI-record A-.
The £398 million ($617 million) placement carries a wrap from Financial Security Assurance (FSA), a further sign of the monolines' strengthening grip on the market. With UK spreads increasing, the triple-A policy is the only certain way to shift large volumes of paper.
GCHQ is a design-build-finance-operate (DBFO) contract to create new office accommodation for the government's intelligence interceptions service. Even more than the recent ministry (defence and finance) deals, it is a radical shift from the schools, roads and hospitals that make up the bulk of PFI deal flow. And the placement is estimated at three times the size of the previous largest deal in the sector.
The UK government's desire to bring about an improvement in facilities is well documented. The buildings, located at Cheltenham in Gloucestershire, date back up to 50 years. The new building merits the tag ?stadium-size? and contains all of the sophisticated electronic infrastructure necessary to carry out the UK government's eavesdropping activities.
The preferred bidder on the contract was announced in October 1998, with a consortium comprising construction firm Tarmac (later demerged construction arm Carillion (40%)), security firm Group 4 Securitas (40%) and incumbent UK telco BT (20%) selected to carry out the contract. All of the sponsors, who formed contract company Integrated Accommodation Services, have experience in PFI, whether in prisons, communications or construction. The security and secrecy surrounding the project have perhaps been overstated, but little was heard on the project between the start of 1999 ? when Deutsche were appointed in a debt providing capacity ? and the start of the year, when rumours of a bond financing began to emerge.
The delay probably has as much to do with creating an optimal risk sharing deal as any suggestion of pre-nuptial nerves on the part of the Foreign and Commonwealth Office. Given the circle through which any project documentation would have had to go, the added reports required to reach out to bond investors would not have created any more concern than was already evident.
And GCHQ is a unique asset, one, according to the psychology of those involved in the deal, that the government could not afford to see fail. Some of the structures of the contract are reasonably familiar from hospital deals, for instance the acceptance that the concessionaires should not involve themselves with front-line activity. Other features, such as the requirement of security clearance for personnel, are more novel.
The requirement is important since the most daring move on the part of the concession awarders has been to make Group 4 responsible for physical site security. This process will involve the transfer of a number of staff to the private sector, but clearance and results still largely rest with the government.
Political risk is another aspect that becomes more important with an asset of this type, since with PFI projects this is usually confined to an assessment of government commitment to the initiative. Other factors, such as terrorist attack, must be taken into account. And the cost reflects a much higher standard of build required for the facility's secretive new occupants.
The design, whilst capable of wowing the domestic press, does use proven technology and includes added protections to ensure structural integrity over the life of the asset. The building can be assembled in sections, meaning that construction risk is lowered after the initial foundations are laid on-site. BT, acting as a subcontractor, will be responsible for some of the non-critical communications infrastructure, including phones and laptops.
Government unitary payments cover the debt service, and are made up of a fixed and an index-linked element. The fixed element alone is enough to cover senior debt service 1.9x, although this element is not inflation-proof. The first element is designed to mirror initial construction costs, with the RPI element covering life-cycle maintenance costs.
Much of the mitigation of the risks associated with penalty deductions (for such events as security lapses or unavailability) has been passed on to subcontractors, usually other parts of the sponsors' businesses, or by the issuing of performance bonds. One of £80 million has been taken out with St Paul International Insurance, and Group 4's FM obligations are covered by an £11 million termination bond from ABN Amro. However, post completion the proceeds of land sales on the old site, for which Alfed McAlpine has already agreed to act as a purchaser, which could amount to roughly £2.2 million.
In common with most PFI deals, the structure is highly leveraged, with sponsors putting in just £55,000 of pure equity, with the remainder of their commitments coming in the form of £22 million of subordinated debt, only paid in after completion. A further £22 million of mezzanine bonds, believed to have been subscribed to by Abbey National, complete the capital structure.
Deutsche Bank placed the senior bonds to a group of around 30 institutional investors, largely in the pensions and insurance sectors. The bonds were priced at 180bp over the 2021 Gilt, higher than initial talk putting the bonds within the 165-175bp range, but below the 185bp that Baglan Moor ended up at in May. One reason for this might be the project's strong underlying rating, put at Baa1 by Moody's Investors Service and Standard & Poor's are believed to have given it a PFI-record A-.
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.