Sweden's first PPP refinances
Syndication closed in April on the Skr1.33 billion ($150 million)
debt refinancing of the A-Train rail-air link in Sweden. The
project, designed to link Stockholm and the country's principal
airport, Arlanda, is Sweden's first, and to date only, major Public
Private Partnership (PPP). The refinancing has been made possible
by the dramatic decrease in risk on the project post-completion.
The Swedish government awarded the concession to a consortium of ALSTOM, NCC, Vattenfall and John Mowlem in 1995. The design-build-finance-operate contract lasts for 45 years. The project benefits from an exceptionally long tail since, even with the refinancing's extension, the tenor of the debt is only 14 years.
The sponsors also acted as subcontractors within the contract structure; ALSTOM supplying the rolling stock and telecoms equipment, Vattenfall providing underground engineering services through its hydro subsidiary, Mowlem laying track and NCC covering the remaining overhead construction services. NCC merged with another sponsor, Siab, whilst the financing was being put together and is now Sweden's largest construction firm.
The original financing was put together in May 1996 by Bank of Tokyo-Mitsubishi, Bayerische Landesbank Girozentrale and Union Bank of Switzerland. It included a term loan of Skr1 billion and a Skr330 million guarantee facility. Construction had already started on the 25km line, which finally came into operation in November 1999.
The original pricing on the deal stood at 200bps over Libor, dropping to 150bps six months after the start of operations, a reflection that the project was not only technically advanced but also operating in a country with little experience of PPPs. However, the sponsors were examining refinancing operations pre-completion from an early stage, and originally approached a number of Nordic banks to take on the mandate. Difficulties within this group, in particular over structuring, led to this process becoming stalled. In addition there were doubts over whether the debt could be effectively syndicated.
Bank of America chased the original mandate back in the middle of the last decade, and was unsuccessful at that point, later coming in as a participant. Now joined by a team member from the original arranging group, it re-bid successfully, although it was forced to offer longer terms that its original submission. It began working on the mandate in the summer of 1999.
The final determinant of the refinancing was the improvement in the traffic forecasts for the rail link. With fares kept at Skr120 (roughly $14) for the journey and buoyant passenger growth at Arlanda, analysts could afford to be more optimistic. Forecasts were put together by A-Train's advisers SDG and Aero Hostings, and were subsequently checked by the banks' auditors Symonds. These cautiously revised air passenger numbers up to 22.4 million from 19.8 million.
Pricing on the loan now starts at 125bps until the six month period is up, and then falls to 95bps until 2004, climbing to 110bps up to 2009 and 115bps thereafter. The package was closed by Bank of America as lead arranger, Svensk Exportkredit AB as co-arranger and Handelsbanken Markets as security agent in December 1999. It was launched into syndication soon after. Compared with the time that PPP-type projects have taken to refinance in ?experienced? UK markets, the six-month timetable was ambitious.
Five further banks were invited into the deal with a targeted syndication, of which four had been involved with the original package. Bank of Ireland, Bayerische Landesbank, Royal Bank of Scotland and Sumitomo agreed to participate to the tune of Skr150 million, a huge increase on the more limited commitments on the first deal. Joined by Abbey National Treasury Services, these commitments were scaled back to Skr122.5 million.
The project structure also includes the retention of leasing arrangements assembled through Nordbanken AB for 6 of the 7 trainsets. The new structure also includes interest rate hedging arrangements seen as essential for the comfort of the banks involved with the financing. The original deal had contemplated hedging but abandoned the idea. The vulnerability of the project to interest rate volatility in its early years is thought to have prompted this change of heart.
All of the names involved have a background in public-private sector deals, in what appears to be a conscious rejection of the local market-orientated focus of the abortive first refinancing group. Since Sweden still does not have a track record in the promotion of PPP schemes, the decision is a logical one.
This situation may be about to change. The original A-Train project was signed off in the dying days of the country's last conservative government. The Social Democratic Party government that followed showed markedly less enthusiasm for the project. The parallels with the incoming UK Labour government's endorsement of PFI do exist, though there have recently been moves to revitalise the initiative.
In December, a new bill was passed in the Swedish parliament to enable a further raft of projects to go ahead. Nevertheless, there is still some resistance to these deals, in a country where the culture of state provision is well ingrained. It is clear that the exhaustive additional testing on the system and reliability has its roots at least in part in these misgivings. However, any upturn in activity will feed through to the roads sector, where the Swedish government has several projects under consideration.
The Swedish government awarded the concession to a consortium of ALSTOM, NCC, Vattenfall and John Mowlem in 1995. The design-build-finance-operate contract lasts for 45 years. The project benefits from an exceptionally long tail since, even with the refinancing's extension, the tenor of the debt is only 14 years.
The sponsors also acted as subcontractors within the contract structure; ALSTOM supplying the rolling stock and telecoms equipment, Vattenfall providing underground engineering services through its hydro subsidiary, Mowlem laying track and NCC covering the remaining overhead construction services. NCC merged with another sponsor, Siab, whilst the financing was being put together and is now Sweden's largest construction firm.
The original financing was put together in May 1996 by Bank of Tokyo-Mitsubishi, Bayerische Landesbank Girozentrale and Union Bank of Switzerland. It included a term loan of Skr1 billion and a Skr330 million guarantee facility. Construction had already started on the 25km line, which finally came into operation in November 1999.
The original pricing on the deal stood at 200bps over Libor, dropping to 150bps six months after the start of operations, a reflection that the project was not only technically advanced but also operating in a country with little experience of PPPs. However, the sponsors were examining refinancing operations pre-completion from an early stage, and originally approached a number of Nordic banks to take on the mandate. Difficulties within this group, in particular over structuring, led to this process becoming stalled. In addition there were doubts over whether the debt could be effectively syndicated.
Bank of America chased the original mandate back in the middle of the last decade, and was unsuccessful at that point, later coming in as a participant. Now joined by a team member from the original arranging group, it re-bid successfully, although it was forced to offer longer terms that its original submission. It began working on the mandate in the summer of 1999.
The final determinant of the refinancing was the improvement in the traffic forecasts for the rail link. With fares kept at Skr120 (roughly $14) for the journey and buoyant passenger growth at Arlanda, analysts could afford to be more optimistic. Forecasts were put together by A-Train's advisers SDG and Aero Hostings, and were subsequently checked by the banks' auditors Symonds. These cautiously revised air passenger numbers up to 22.4 million from 19.8 million.
Pricing on the loan now starts at 125bps until the six month period is up, and then falls to 95bps until 2004, climbing to 110bps up to 2009 and 115bps thereafter. The package was closed by Bank of America as lead arranger, Svensk Exportkredit AB as co-arranger and Handelsbanken Markets as security agent in December 1999. It was launched into syndication soon after. Compared with the time that PPP-type projects have taken to refinance in ?experienced? UK markets, the six-month timetable was ambitious.
Five further banks were invited into the deal with a targeted syndication, of which four had been involved with the original package. Bank of Ireland, Bayerische Landesbank, Royal Bank of Scotland and Sumitomo agreed to participate to the tune of Skr150 million, a huge increase on the more limited commitments on the first deal. Joined by Abbey National Treasury Services, these commitments were scaled back to Skr122.5 million.
The project structure also includes the retention of leasing arrangements assembled through Nordbanken AB for 6 of the 7 trainsets. The new structure also includes interest rate hedging arrangements seen as essential for the comfort of the banks involved with the financing. The original deal had contemplated hedging but abandoned the idea. The vulnerability of the project to interest rate volatility in its early years is thought to have prompted this change of heart.
All of the names involved have a background in public-private sector deals, in what appears to be a conscious rejection of the local market-orientated focus of the abortive first refinancing group. Since Sweden still does not have a track record in the promotion of PPP schemes, the decision is a logical one.
This situation may be about to change. The original A-Train project was signed off in the dying days of the country's last conservative government. The Social Democratic Party government that followed showed markedly less enthusiasm for the project. The parallels with the incoming UK Labour government's endorsement of PFI do exist, though there have recently been moves to revitalise the initiative.
In December, a new bill was passed in the Swedish parliament to enable a further raft of projects to go ahead. Nevertheless, there is still some resistance to these deals, in a country where the culture of state provision is well ingrained. It is clear that the exhaustive additional testing on the system and reliability has its roots at least in part in these misgivings. However, any upturn in activity will feed through to the roads sector, where the Swedish government has several projects under consideration.
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