Spencer Street
Australian PPP Deal of the Year 2002
Spencer Street Station
The biggest public private partnership project to date under the Partnerships Victoria programme, the Spencer Street Station redevelopment in Melbourne, is a keenly-priced example of income stream diversification and risk allocation under Australia's new regional PPP push. If potential investors were unclear as to how and what could be earned from Australian PPP ? Spencer Street proffered clarity.
The concession, to be renamed Southern Cross Station, is expected to maximise integration between Melbourne's western central bus station and its docklands, whilst significantly enhancing local amenities.
The project is based around a very solid 30-year income stream in the form of payments to the consortium from the Spencer Street Station Authority (SSSA) for the ongoing maintenance of the station, its environs, and the provision of services. Concession terms also include the right to generate income from retail, advertising and bus access fees.
The winning consortium, Civic Nexus ? comprising ABN Amro (sole financial arranger and underwriter); Leighton Contractors (EPC); Honeywell (maintenance contractor); and Delaware North (head retail lease) ? has also acquired the rights to commercial developments adjacent to the station.
The financing comprises a A$135 million ($82 million) 30-year inflation linked bond; a A$200 million 12-year bullet; and A$90 million in equity. Total project capital cost is A$425 million.
The bonds attracted a preliminary rating of Aa2 from Moody's and pricing reflects the low risk on the deal. Pricing on the 30-year tranche was 45bp over commonwealth government capital indexed bonds with the fixed rate yield coming in at 67bp over swap. Coupon was 6.5%, accruing quarterly from 31 October 2002.
The 30-year tenor on the deal matches the concession period and is the maximum the market is likely to extend to: but for the strength of the SSSA payment structure over that time, it would have been a hard sell. The payment cascade, as is typical, also ensures timely debt servicing. And the structure also allows for witholding dividends from equity in the unlikely event of a debt service crisis.
But at the heart of the financial engineering is ABN Amro's forward starting interest rate swap with Civic Nexus. This is critical in mitigating the refinancing risk for the 12-year bullet bond by eliminating future base interest rate risk. ABN Amro will swap the fixed cash that the project company receives from the government with floating money from years 12 to 30 of the concession.
Furthermore, with ABN Amro a member of the consortium and sole underwriter, low refinancing fees and margins are built into refinancing assumptions.
Although a relatively untested market on this scale of deal, competition for the concession was strong. Autraland Holdings consortium (John Holland and Commonwealth Bank of Australia backed by Royal Bank of Scotland and Westpac) and the Multiplex/Rothschild consortium (backed by Bank of Scotland, Credit Agricole Indosuez and HypoVereinsbank) both put in competing bids. But with ABN Amro willing to asssume all underwriting, Civic Nexus won in August with bond issuance following rapidly on 31 October.
Project construction is under a fixed-price/fixed-time contract with financial enhancements to guarantee completion. The construction phase is 2.5 years ? operating start date 2005 ? with an additional 3.5 years (if necessary) until sunset date.
ABN Amro provides bondholders with a letter of credit, thus guaranteeing debt service until completion or the sunset date and a top up/first loss of up to A$70 million if there is a shortfall under the termination agreement.
Construction risk is thus minimal; especially given that redevelopment involves building a large roof and bus interchange, while existing rail track and platforms remain unchanged.
Furthermore, the performance of the turnkey contractor ? Leighton Contractors ? is guaranteed by parent company BBB+-rated Leighton Holdings. And in the event of a construction default the Spencer Street Station Authority (SSSA) will pay Civic Nexus a termination sum equivalent to the total value of the project minus completion costs.
The key performance indicators that have to met by the consortium, although wide ranging, are also designed to make sure the deal gets done.
There are 57 measures of performance. All carry penalty points that translate into a percentage cut in SSSA payments on an escalating scale whereby higher penalty points mean an increasingly greater percentage of those core service payments.
Nevertheless, the majority of performance indicators contain rectification periods before going into default and penalty points are set to zero each quarter. Many indicators also require repeated failure before penalty points accrue.
Civic Nexus has a A$3 million reserve to cover any abatement in SSSA payments. But the risk is very low given that Honeywell is a major international operator and has a parent company guarantee, combined with a $15 million bank guarantee.
Spencer Street is a benchmark deal fulfilling the PPP aim as voiced in commonwealth PPP taskforce policy: value for money and reasonable risk allocation. The deal's structural enhancements ? a flexible default regime; a range of termination payments from the state (the size of which depends on the events leading to termination); the operational cash reserves and performance security that ensure sufficient project liquidity ? all combine to create a robust and repeatable project.
Spencer Street Station
Status: Closed 31 October 2002
Location: Victoria, Australia
Description: Public private partnership redevelopment of Melbourne's Spencer Street Station and retail precinct.
Total project cost: A$425 million
Total project debt: A$335 million comprising A$135 million 30-year inflation linked; A$200 million 12-year fixed rate
Sponsor: Civic Nexus consortium (ABN Amro Australia, Leighton Holdings, Honeywell, Delaware North)
Concession awarder: Victoria Department of Infrastructure
Financial adviser to concession awarder: PricewaterhouseCoopers
Sole arranger and debt/equity underwriter: ABN Amro
EPC: Leighton Construction
Maintenance: Honeywell
Architects: Daryl Jack/Nicholas Grimshaw
Legal advisor to the concession awarder: Allens Arthur Robinson
Legal adviser to the consortium: Blake Dawson Waldron.
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Spencer Street Station
The biggest public private partnership project to date under the Partnerships Victoria programme, the Spencer Street Station redevelopment in Melbourne, is a keenly-priced example of income stream diversification and risk allocation under Australia's new regional PPP push. If potential investors were unclear as to how and what could be earned from Australian PPP ? Spencer Street proffered clarity.
The concession, to be renamed Southern Cross Station, is expected to maximise integration between Melbourne's western central bus station and its docklands, whilst significantly enhancing local amenities.
The project is based around a very solid 30-year income stream in the form of payments to the consortium from the Spencer Street Station Authority (SSSA) for the ongoing maintenance of the station, its environs, and the provision of services. Concession terms also include the right to generate income from retail, advertising and bus access fees.
The winning consortium, Civic Nexus ? comprising ABN Amro (sole financial arranger and underwriter); Leighton Contractors (EPC); Honeywell (maintenance contractor); and Delaware North (head retail lease) ? has also acquired the rights to commercial developments adjacent to the station.
The financing comprises a A$135 million ($82 million) 30-year inflation linked bond; a A$200 million 12-year bullet; and A$90 million in equity. Total project capital cost is A$425 million.
The bonds attracted a preliminary rating of Aa2 from Moody's and pricing reflects the low risk on the deal. Pricing on the 30-year tranche was 45bp over commonwealth government capital indexed bonds with the fixed rate yield coming in at 67bp over swap. Coupon was 6.5%, accruing quarterly from 31 October 2002.
The 30-year tenor on the deal matches the concession period and is the maximum the market is likely to extend to: but for the strength of the SSSA payment structure over that time, it would have been a hard sell. The payment cascade, as is typical, also ensures timely debt servicing. And the structure also allows for witholding dividends from equity in the unlikely event of a debt service crisis.
But at the heart of the financial engineering is ABN Amro's forward starting interest rate swap with Civic Nexus. This is critical in mitigating the refinancing risk for the 12-year bullet bond by eliminating future base interest rate risk. ABN Amro will swap the fixed cash that the project company receives from the government with floating money from years 12 to 30 of the concession.
Furthermore, with ABN Amro a member of the consortium and sole underwriter, low refinancing fees and margins are built into refinancing assumptions.
Although a relatively untested market on this scale of deal, competition for the concession was strong. Autraland Holdings consortium (John Holland and Commonwealth Bank of Australia backed by Royal Bank of Scotland and Westpac) and the Multiplex/Rothschild consortium (backed by Bank of Scotland, Credit Agricole Indosuez and HypoVereinsbank) both put in competing bids. But with ABN Amro willing to asssume all underwriting, Civic Nexus won in August with bond issuance following rapidly on 31 October.
Project construction is under a fixed-price/fixed-time contract with financial enhancements to guarantee completion. The construction phase is 2.5 years ? operating start date 2005 ? with an additional 3.5 years (if necessary) until sunset date.
ABN Amro provides bondholders with a letter of credit, thus guaranteeing debt service until completion or the sunset date and a top up/first loss of up to A$70 million if there is a shortfall under the termination agreement.
Construction risk is thus minimal; especially given that redevelopment involves building a large roof and bus interchange, while existing rail track and platforms remain unchanged.
Furthermore, the performance of the turnkey contractor ? Leighton Contractors ? is guaranteed by parent company BBB+-rated Leighton Holdings. And in the event of a construction default the Spencer Street Station Authority (SSSA) will pay Civic Nexus a termination sum equivalent to the total value of the project minus completion costs.
The key performance indicators that have to met by the consortium, although wide ranging, are also designed to make sure the deal gets done.
There are 57 measures of performance. All carry penalty points that translate into a percentage cut in SSSA payments on an escalating scale whereby higher penalty points mean an increasingly greater percentage of those core service payments.
Nevertheless, the majority of performance indicators contain rectification periods before going into default and penalty points are set to zero each quarter. Many indicators also require repeated failure before penalty points accrue.
Civic Nexus has a A$3 million reserve to cover any abatement in SSSA payments. But the risk is very low given that Honeywell is a major international operator and has a parent company guarantee, combined with a $15 million bank guarantee.
Spencer Street is a benchmark deal fulfilling the PPP aim as voiced in commonwealth PPP taskforce policy: value for money and reasonable risk allocation. The deal's structural enhancements ? a flexible default regime; a range of termination payments from the state (the size of which depends on the events leading to termination); the operational cash reserves and performance security that ensure sufficient project liquidity ? all combine to create a robust and repeatable project.
Spencer Street Station
Status: Closed 31 October 2002
Location: Victoria, Australia
Description: Public private partnership redevelopment of Melbourne's Spencer Street Station and retail precinct.
Total project cost: A$425 million
Total project debt: A$335 million comprising A$135 million 30-year inflation linked; A$200 million 12-year fixed rate
Sponsor: Civic Nexus consortium (ABN Amro Australia, Leighton Holdings, Honeywell, Delaware North)
Concession awarder: Victoria Department of Infrastructure
Financial adviser to concession awarder: PricewaterhouseCoopers
Sole arranger and debt/equity underwriter: ABN Amro
EPC: Leighton Construction
Maintenance: Honeywell
Architects: Daryl Jack/Nicholas Grimshaw
Legal advisor to the concession awarder: Allens Arthur Robinson
Legal adviser to the consortium: Blake Dawson Waldron.
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