European Water deal of the year
The use of project bonds to back UK PFI/PPP deals has been
expanding for the last two years but Stirling is a first. The
consortium assembled by Thames Water, MJ Gleeson and Montgomery
Watson, used a monoline wrapped bond package that could be the way
most water concessions are funded in a market which has promising
potential in 1999.
Stirling Seafield Finance is essentially the vehicle used to finance the two separately tendered but operationally inter-linked water facilities in the East of Scotland, Almond Valley/Seafield and Esk. Scotland's water industry has been split into three public water authorities capable of providing strong backing for wastewater service payments. Stirling's thirty-year concession with East of Scotland Water did leave the sponsors at the mercy of volume risk, with demographics static or in slight decline.
Thames Water was locked into an aggressive and tight structure, with performance targets and penalties relatively stringent, but is an established BOT operator with a good degree of technical expertise. More importantly, risk mitigation structures could be put into place to hive off the areas more exposed to termination risk ? the partial termination concept.
Standard & Poor's rated these fundamentals as a shadow or underlying rating prior to arranging the financing. Given the long length of the concession, and at a time when the PFI bond market was booming, Stirling, advised by SG, opted to go for a bond issue. Where the financing departed from standard practice was in the sponsors' decision to opt for a monoline wrap, both for reasons of confidence and for the NBV benefit, at a time when un-enhanced spreads were edging up.
MBIA-Ambac insured the bond, guaranteeing it AAA status, after a stringent due diligence, as well as the certainty that the shadow rating was at the required grade. The £79 million ($130 million) issue was lead managed by Royal Bank of Canada and launched in March. As John Mitchell, project leader at Thames explains, ?because funding is cheaper they have to make sure that every risk is assigned to a certain party.?
Given the smooth progress of the financing, most of the obstacles presented themselves at the planning stage. Final close was dependent on pipeline permits and approval of architectural plans, and this even included altering the layout and colour of the tanks, situated on the shores of the Firth of Forth.
The later, Esk-based, £29 million bond was launched in December by the same team of managers ? indeed the documentation covered both projects ? for a higher sum than anticipated because of the drawn out optimisation process. Financing was also backed by £14.8 million in sub-debt, and £4.95 million in equity, and given the leveraged nature of the financing its success is all the more impressive. Construction has now started and is about 20% complete.
This form of financing is now effectively closed out in the privatised utilities of England, but offers a real model by which other governments taking tentative PPP steps can work. Delphland of Holland is one interested party, and Thames hopes that the process can also be used from its recently acquired US springboards. Given the upheaval expected in water industries later this year, the model is likely to travel much further.
Stirling Seafield Finance is essentially the vehicle used to finance the two separately tendered but operationally inter-linked water facilities in the East of Scotland, Almond Valley/Seafield and Esk. Scotland's water industry has been split into three public water authorities capable of providing strong backing for wastewater service payments. Stirling's thirty-year concession with East of Scotland Water did leave the sponsors at the mercy of volume risk, with demographics static or in slight decline.
Thames Water was locked into an aggressive and tight structure, with performance targets and penalties relatively stringent, but is an established BOT operator with a good degree of technical expertise. More importantly, risk mitigation structures could be put into place to hive off the areas more exposed to termination risk ? the partial termination concept.
Standard & Poor's rated these fundamentals as a shadow or underlying rating prior to arranging the financing. Given the long length of the concession, and at a time when the PFI bond market was booming, Stirling, advised by SG, opted to go for a bond issue. Where the financing departed from standard practice was in the sponsors' decision to opt for a monoline wrap, both for reasons of confidence and for the NBV benefit, at a time when un-enhanced spreads were edging up.
MBIA-Ambac insured the bond, guaranteeing it AAA status, after a stringent due diligence, as well as the certainty that the shadow rating was at the required grade. The £79 million ($130 million) issue was lead managed by Royal Bank of Canada and launched in March. As John Mitchell, project leader at Thames explains, ?because funding is cheaper they have to make sure that every risk is assigned to a certain party.?
Given the smooth progress of the financing, most of the obstacles presented themselves at the planning stage. Final close was dependent on pipeline permits and approval of architectural plans, and this even included altering the layout and colour of the tanks, situated on the shores of the Firth of Forth.
The later, Esk-based, £29 million bond was launched in December by the same team of managers ? indeed the documentation covered both projects ? for a higher sum than anticipated because of the drawn out optimisation process. Financing was also backed by £14.8 million in sub-debt, and £4.95 million in equity, and given the leveraged nature of the financing its success is all the more impressive. Construction has now started and is about 20% complete.
This form of financing is now effectively closed out in the privatised utilities of England, but offers a real model by which other governments taking tentative PPP steps can work. Delphland of Holland is one interested party, and Thames hopes that the process can also be used from its recently acquired US springboards. Given the upheaval expected in water industries later this year, the model is likely to travel much further.
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