GOGGS: PFI know-how starts here
The refurbishment of the Government Offices Great George Street
(GOGGS) sets the benchmark for doing business in the PFI market.
That the Treasury Task Force (TTF), the powerhouse behind the PFI
initiative, has done the deal at the centre of the UK government's
finances is, participants say, entirely a coincidence. From the
point of view of sponsors the most important part of the deal is
that it is the first to use contract standardisation ? the primary
goal for the TTF since PFI was affirmed by the Labour government.
Standardisation is not designed to provide indentikit deal structures and proponents hope that it does not become an article of dogma. Mark Elsey, partner at Ashurst Morris Crisp (which advised the sponsors), calls standardisation ?a genuine leap forward. The standard document can take you about three-quarters of the way on most deals. It's certainly a useful tool to avoid re-inventing the wheel on each project?. He also adds: ?The projects business is constantly evolving. There is a danger that standardisation becomes an end itself and encourages people to adopt unflexible positions where circumstances merit alternative solutions?.
GOGGS was initiated in 1995 under Conservative Chancellor of the Exchequer Kenneth Clarke. The project is a part refurbishment of the Whitehall offices housing the Treasury and was originally slated as a wholesale contract. The government chose the Exchequer Partnership (EP) consortium as preferred bidder in September 1996, but the project was shelved after the Labour government's election.
Whilst the commitment of Labour to the PFI process has never been severely shaken (largely because of a promise to stick to inherited spending plans), GOGGS was put aside in favour of more voter-friendly hospital and schools deals. Then Paymaster-General Geoffrey Robinson resumed negotiations with EP, made up of Bovis Lend Lease, Stanhope and Chesterton, in October 1998. The work was scaled back to half of the offices and a less demanding programme of refurbishment.
EP was allowed to continue as preferred bidder on the condition that it held a funding competition, seen as the best way for the Treasury to extract value for money from an already protracted process. EP was permitted to line up its own mezzanine ? provided by advisors SG ? although it also put this up for competition. The TTF's in-depth involvement in the deal therefore continued long beyond commercial close on 5 July 1999.
28 banks were invited to submit proposals, of which nine declined and eight were shortlisted. The contest came down to a mixture of monolines, deep-pocketed underwriters and long-tenor comfortable European banks. Deutsche and UBS Warburg (then Warburg Dillon Read) competed for the underwriting mandate, FSA and Ambac (then MBIA-Ambac) squared off for insurance, and Abbey National, Dexia, Halifax and HypoVereinsbank put forward loan suggestions.
The proposals were judged simply on the basis of best value and the willingness to accept the contract structure as it stood. Bidders received a detailed memo, project documents and term sheets, as well as reports from funders' advisers (already appointed) and a Standard & Poor's preliminary rating. The final contest came down to the monolines ? largely because they would find it easier to adapt to index-linked repayment streams. FSA narrowly lost out but Dougie Sutherland from the TTF says the process was ?extremely competitive, the difference was almost lost in the rounding?.
Ambac also won the mandate to provide the mezzanine, although FSA was also considering this move. EP had lined up Ambac before the project was halted. The process took about 8 weeks to complete, but was clearly a vast improvement on the time-consuming haggling that often follows commercial close. Peter Cain, head of project finance at Ambac knows where its success lay: ?the primary advantage comes in accessing the index-linked market. Payment streams are index-linked [in this case to inflation] so we can promise the investor no inflation risk?.
UBS Warburg priced the £127.9 million ($185 million) bond issue, representing 90% of project costs, on 28 April 2000. It came in at 163bp over the 2.5% April 2020 index linked gilt. The notes mature in 2035 (two-and-a-half years before the end of the contract) and have an average life of 20.4 years.
The issue slipped out before a swathe of other PFI paper later on in the month, and certainly before spreads headed north. Pricing comparisons have been made with the Baglan Moor deal (185bp) and the A13 bond (see Project Finance, May 2000), and opinions vary as to the reasons for this discrepancy. One school has it that a disturbance in the swaps market pushed later deals up, although the funders point to the Treasury's nominal first call on tax revenues making this a tighter proposition. The bonds were snapped up by a group of largely pension funds, a roughly overlapping group with index-linked investors.
The deal was launched within a week of the earliest date possible, and provided a 7% reduction in their unitary payment according to the comparator used. Financial close waited on the end of the judicial review period necessary for the alterations to a Grade II listed building. Repayments are linked to a single monthly unitary payment for serviced office accommodation, including both hard and soft facilities management, provided by Bovis and Chesterton respectively.
The contract also includes a new default mechanism, stipulating that instead of a fixed NPV-related payment in the event of default, the contract can be put out to tender again and awarded on a competitive basis. Bovis (as contractors) and Stanhope (as developers) have little incentive, however, to see such a prestigious project fail. And the TTF feels that it has the balance about right. ?You have to have a complete and sensible agreement ? there's no point saddling people with unacceptable risks?, says Sutherland. Competition even extended to the deposit bank for the bond proceeds: in this race UBS Warburg came out on top.
The final innovation came with the web-based documentation system used by the participants, Allen & Overy's Newchange dealroom service. Bankers and lawyers, with a few venerable exceptions, have by and large become comfortable with emailing documentation and cutting down on print costs. The dealroom system is designed to save time and hassle associated with multiple drafts and files. Clients can gain access to those documents that they are cleared for and can post their own additions, although Ashursts and Berwin Leighton (for the Treasury) tended to post them through the lenders' lawyers.
At the moment the technology is restricted to the legal aspects, although Anne Baldock, banking partner at Allen & Overy, believes that its application to syndications involving a large number of institutions would be beneficial. Providing that comfort with the system's impartiality and integrity (both structural and ethical) is adequate the system will have quite a future.
Standardisation is not designed to provide indentikit deal structures and proponents hope that it does not become an article of dogma. Mark Elsey, partner at Ashurst Morris Crisp (which advised the sponsors), calls standardisation ?a genuine leap forward. The standard document can take you about three-quarters of the way on most deals. It's certainly a useful tool to avoid re-inventing the wheel on each project?. He also adds: ?The projects business is constantly evolving. There is a danger that standardisation becomes an end itself and encourages people to adopt unflexible positions where circumstances merit alternative solutions?.
GOGGS was initiated in 1995 under Conservative Chancellor of the Exchequer Kenneth Clarke. The project is a part refurbishment of the Whitehall offices housing the Treasury and was originally slated as a wholesale contract. The government chose the Exchequer Partnership (EP) consortium as preferred bidder in September 1996, but the project was shelved after the Labour government's election.
Whilst the commitment of Labour to the PFI process has never been severely shaken (largely because of a promise to stick to inherited spending plans), GOGGS was put aside in favour of more voter-friendly hospital and schools deals. Then Paymaster-General Geoffrey Robinson resumed negotiations with EP, made up of Bovis Lend Lease, Stanhope and Chesterton, in October 1998. The work was scaled back to half of the offices and a less demanding programme of refurbishment.
EP was allowed to continue as preferred bidder on the condition that it held a funding competition, seen as the best way for the Treasury to extract value for money from an already protracted process. EP was permitted to line up its own mezzanine ? provided by advisors SG ? although it also put this up for competition. The TTF's in-depth involvement in the deal therefore continued long beyond commercial close on 5 July 1999.
28 banks were invited to submit proposals, of which nine declined and eight were shortlisted. The contest came down to a mixture of monolines, deep-pocketed underwriters and long-tenor comfortable European banks. Deutsche and UBS Warburg (then Warburg Dillon Read) competed for the underwriting mandate, FSA and Ambac (then MBIA-Ambac) squared off for insurance, and Abbey National, Dexia, Halifax and HypoVereinsbank put forward loan suggestions.
The proposals were judged simply on the basis of best value and the willingness to accept the contract structure as it stood. Bidders received a detailed memo, project documents and term sheets, as well as reports from funders' advisers (already appointed) and a Standard & Poor's preliminary rating. The final contest came down to the monolines ? largely because they would find it easier to adapt to index-linked repayment streams. FSA narrowly lost out but Dougie Sutherland from the TTF says the process was ?extremely competitive, the difference was almost lost in the rounding?.
Ambac also won the mandate to provide the mezzanine, although FSA was also considering this move. EP had lined up Ambac before the project was halted. The process took about 8 weeks to complete, but was clearly a vast improvement on the time-consuming haggling that often follows commercial close. Peter Cain, head of project finance at Ambac knows where its success lay: ?the primary advantage comes in accessing the index-linked market. Payment streams are index-linked [in this case to inflation] so we can promise the investor no inflation risk?.
UBS Warburg priced the £127.9 million ($185 million) bond issue, representing 90% of project costs, on 28 April 2000. It came in at 163bp over the 2.5% April 2020 index linked gilt. The notes mature in 2035 (two-and-a-half years before the end of the contract) and have an average life of 20.4 years.
The issue slipped out before a swathe of other PFI paper later on in the month, and certainly before spreads headed north. Pricing comparisons have been made with the Baglan Moor deal (185bp) and the A13 bond (see Project Finance, May 2000), and opinions vary as to the reasons for this discrepancy. One school has it that a disturbance in the swaps market pushed later deals up, although the funders point to the Treasury's nominal first call on tax revenues making this a tighter proposition. The bonds were snapped up by a group of largely pension funds, a roughly overlapping group with index-linked investors.
The deal was launched within a week of the earliest date possible, and provided a 7% reduction in their unitary payment according to the comparator used. Financial close waited on the end of the judicial review period necessary for the alterations to a Grade II listed building. Repayments are linked to a single monthly unitary payment for serviced office accommodation, including both hard and soft facilities management, provided by Bovis and Chesterton respectively.
The contract also includes a new default mechanism, stipulating that instead of a fixed NPV-related payment in the event of default, the contract can be put out to tender again and awarded on a competitive basis. Bovis (as contractors) and Stanhope (as developers) have little incentive, however, to see such a prestigious project fail. And the TTF feels that it has the balance about right. ?You have to have a complete and sensible agreement ? there's no point saddling people with unacceptable risks?, says Sutherland. Competition even extended to the deposit bank for the bond proceeds: in this race UBS Warburg came out on top.
The final innovation came with the web-based documentation system used by the participants, Allen & Overy's Newchange dealroom service. Bankers and lawyers, with a few venerable exceptions, have by and large become comfortable with emailing documentation and cutting down on print costs. The dealroom system is designed to save time and hassle associated with multiple drafts and files. Clients can gain access to those documents that they are cleared for and can post their own additions, although Ashursts and Berwin Leighton (for the Treasury) tended to post them through the lenders' lawyers.
At the moment the technology is restricted to the legal aspects, although Anne Baldock, banking partner at Allen & Overy, believes that its application to syndications involving a large number of institutions would be beneficial. Providing that comfort with the system's impartiality and integrity (both structural and ethical) is adequate the system will have quite a future.
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