Doing time
Five years ago the UK government announced its preferred bidders
for its first two privately financed prison projects at Bridgend
and Fazakerley. Four years on and Fazakerley ? a Liverpool-based
prison project sponsored by Tarmac and Group 4 ? was in the market
again but this time with a refinancing package.
The prison sector is not one of the most active under PFI but it should provide a steady stream of work for project financiers over the coming year, particularly following a government announcement that future greenfield prison schemes should be financed in the private sector.
Essentially prison projects are real estate deals. And despite the odd hiccup ? namely the well-reported incidents of prisoners going missing under private management in the early years ? the government remains convinced that the private route offers value for money.
Despite their relatively small size, bankers claim that the deals are still appealing and, unlike, schools are no more attractive as bundled commodities.
The stiff competition for the Fazakerley refinancing which saw Bank of America ? arranger in the original financing package ? lose out to ABN Amro, demonstrates as much how commoditized PFI has become, as it does how cut throat the banking market has become in the past few years.
Set with an original margin ranging between 150 basis points (bp) over Libor and 100bp, the Fazakerley refinancing's margin was eventually shaved down to between 90bp and 70bp. However, the deal took nearly a year longer to close than first thought, during which time the climate for bank deals changed. ?From a financing perspective some of the earlier prison deals were conservatively structured and as such, once they are operationally established, represent attractive refinancing opportunities,? says Mark Wells, vice-president in the power and infrastructure department at ABN Amro in London.
ABN Amro clearly benefited from having a rock solid financing structure to deal with first. Early prison financings were laying the groundwork for future PFI deals. And prison projects, initially had to deal with issues such as: What happens if the prisoners riot? Is the Prison Service operator of last resort?
?There were some early concerns about rioting but insurance is now available,? says Mark Elsey, partner at Ashurst Morris Crisp in London. ?Essentially these are very straight forward deals. Prisons are not generally difficult to build, there is no volume risk, and you don't have the complex operational interface that exists with a hospital or army barracks, and you are paid as long as the prison is built to the correct standard.?
But unlike hospital projects, where financiers have to deal with a different health trust for each deal, this experience has remained within the Prison Service, allowing it to become highly efficient in obtaining the best pricing on a deal. Financing for Onley and Marchington prisons have undoubtedly benefited from this.
Some prison projects have rejected both bond and bank debt financing. Correction Corporation of America (CCA) and Sodexo are the sponsors of the £60 million Agecroft prison in Salford, UK ? an 800-bed category B prison. The project, the fourth prison deal to be financed under the UK's Private Finance Initiative (PFI), was initially to be financed using a project bond managed by Morgan Stanley. But despite the fact that ?the deal was eminently doable,? according to David Gye, advisory director at Morgan Stanley Dean Witter in London, the sponsors chose to switch to an equity finance deal through a US real estate trust which was linked to the sponsor.
At the time of funding one of the main shareholders merging with CCA had already funded a number of similar real estate projects in the US and wanted to extend the funding to the UK. The sponsors felt that the CCA-REIT financing package that emerged would be an easier and quicker method of financing. In the event REIT and CCA demerged. This kind of funding has not been available for subsequent prison deals.
Says Alan Douglas, vice-president in the EMEA project finance group at Bank of America in London: ?Prison deals are still appealing. There is a ready supply of lenders for all of these projects and genuine competition for deals. However, on some of the smaller deals there tends to be a different group of banks who do the deals now.?
Other bankers agree. With the Prison Service increasingly reducing its risk and shaving down margins as low as they can go, larger lenders are making way for smaller financiers.
The prison sector is not one of the most active under PFI but it should provide a steady stream of work for project financiers over the coming year, particularly following a government announcement that future greenfield prison schemes should be financed in the private sector.
Essentially prison projects are real estate deals. And despite the odd hiccup ? namely the well-reported incidents of prisoners going missing under private management in the early years ? the government remains convinced that the private route offers value for money.
Despite their relatively small size, bankers claim that the deals are still appealing and, unlike, schools are no more attractive as bundled commodities.
The stiff competition for the Fazakerley refinancing which saw Bank of America ? arranger in the original financing package ? lose out to ABN Amro, demonstrates as much how commoditized PFI has become, as it does how cut throat the banking market has become in the past few years.
Set with an original margin ranging between 150 basis points (bp) over Libor and 100bp, the Fazakerley refinancing's margin was eventually shaved down to between 90bp and 70bp. However, the deal took nearly a year longer to close than first thought, during which time the climate for bank deals changed. ?From a financing perspective some of the earlier prison deals were conservatively structured and as such, once they are operationally established, represent attractive refinancing opportunities,? says Mark Wells, vice-president in the power and infrastructure department at ABN Amro in London.
ABN Amro clearly benefited from having a rock solid financing structure to deal with first. Early prison financings were laying the groundwork for future PFI deals. And prison projects, initially had to deal with issues such as: What happens if the prisoners riot? Is the Prison Service operator of last resort?
?There were some early concerns about rioting but insurance is now available,? says Mark Elsey, partner at Ashurst Morris Crisp in London. ?Essentially these are very straight forward deals. Prisons are not generally difficult to build, there is no volume risk, and you don't have the complex operational interface that exists with a hospital or army barracks, and you are paid as long as the prison is built to the correct standard.?
But unlike hospital projects, where financiers have to deal with a different health trust for each deal, this experience has remained within the Prison Service, allowing it to become highly efficient in obtaining the best pricing on a deal. Financing for Onley and Marchington prisons have undoubtedly benefited from this.
Some prison projects have rejected both bond and bank debt financing. Correction Corporation of America (CCA) and Sodexo are the sponsors of the £60 million Agecroft prison in Salford, UK ? an 800-bed category B prison. The project, the fourth prison deal to be financed under the UK's Private Finance Initiative (PFI), was initially to be financed using a project bond managed by Morgan Stanley. But despite the fact that ?the deal was eminently doable,? according to David Gye, advisory director at Morgan Stanley Dean Witter in London, the sponsors chose to switch to an equity finance deal through a US real estate trust which was linked to the sponsor.
At the time of funding one of the main shareholders merging with CCA had already funded a number of similar real estate projects in the US and wanted to extend the funding to the UK. The sponsors felt that the CCA-REIT financing package that emerged would be an easier and quicker method of financing. In the event REIT and CCA demerged. This kind of funding has not been available for subsequent prison deals.
Says Alan Douglas, vice-president in the EMEA project finance group at Bank of America in London: ?Prison deals are still appealing. There is a ready supply of lenders for all of these projects and genuine competition for deals. However, on some of the smaller deals there tends to be a different group of banks who do the deals now.?
Other bankers agree. With the Prison Service increasingly reducing its risk and shaving down margins as low as they can go, larger lenders are making way for smaller financiers.
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