The supported debt model (SDM) used on Aspire Schools' A$278 million ($247 million) South East Queensland (SEQ) schools PPP was a first for the Australian market. Although SDM has its detractors, and it is still unclear whether the template will be repeated, the new model enabled the sponsors and awarding authority to close a key social PPP on viable terms at a time when the bank market had all but frozen, margins had inflated and tenors had shortened.

Aspire – a consortium comprising Commonwealth Bank of Australia, Leighton Contractors and Broad Construction Services – won the PPP contract from the Queensland State Government in March 2009 and works began before financial close in April. The 30-year design-build-finance-operate concession involves the delivery of seven new schools – Peregian Springs (667 pupils), Bay View (775 pupils), Bellbird Park (837 pupils), Collingwood Park (808 pupils), East Commera (823 pupils), Bundilla (581 pupils) and Murrumba Downs (1,288 pupils).

The SDM was developed after the Queensland government sounded out lenders in 2007. Under SDM, funding for the construction phase of the schools is 100% covered by the private sector. However, during the operating phase, Queensland Treasury Corporation (QTC) takes over providing 70% of the financing for the whole operational life of the project (around 28 years after construction), with private lenders providing the balance as 20% subordinated debt, and 10% coming in as sponsor equity.

The operating phase debt and equity will comprise QTC with a total of A$193.9 million of debt, and Commonwealth Bank of Australia and Leighton Infrastructure Investments Pty Ltd with a combined A$32.1 million of equity on a 50/50 basis.

The rationale underpinning the SDM is that the Queensland government can raise funds at or below the interbank benchmark and therefore supported debt is better value for money than a 100% privately financed PPP or a traditional procurement.

The SDM was so new when the procurement process for the SEQ schools project got underway that how it would actually work in practice was developed during the process, although it did borrow elements from the UK's CGF scheme. Added to that, the project was Queensland's first schools PPP, so the model was also being applied to a new asset class.

As Laurie Walker, head of project and infrastructure execution, Commonwealth Bank of Australia, says, the deal was "challenging because it was a new model. The market hadn't seen it in a developed form, so there were issues of bid and timetable risk. There was also a limited appetite for subordinated debt, and supporting it with the senior QTC debt as a takeout facility threw up its own issues around intercreditor rights. Then there was the timetable, which was very aggressive. We got the go-ahead in March, signed some contracts in April with an early works package and reached full contractual and financial close in May."

Each school is delivered in two stages. Funding for construction and development costs associated with each stage is progressively provided from the following revolving debt facilities. First drawdowns come from a A$51.1 million subordinated construction facility with a 10-year tenor, and second draws come from a A$51.9 million senior construction facility, which has a 5.5-year tenor. The subordinated construction facility was provided by National Australia Bank (NAB), Commonwealth Bank of Australia and an undisclosed party (believed to be Leighton). The senior construction facility was solely provided by NAB.

The senior construction facility is a floating rate advance while the subordinated construction debt has a floating margin that is hedged via the payment mechanism with the state.

At the completion date for each of the two stages of construction, tranches of QTC debt, subordinated term debt and equity are drawn and used to repay the construction facilities in proportions of 70%, 20% and 10% respectively. The revolving facilities are then available to fund further stages of construction.

QTC debt will only be drawn upon successful certification of each of the stages for each of the seven schools. And because the QTC funding rate was fixed and drawdowns were determined at financial close, a late fee is payable if tranches are not drawn on their specified drawdown date.

One of the issues most often cited by detractors of SDM is conflict of interest. With Queensland as both procurer and debt provider there is the potential for the sponsors and sub-lenders to be pushed in unwelcome directions.

However, QTC added to lender and sponsor comfort by agreeing to act as a passive senior lender and afford many enforcement rights – step-in rights for example – to the private sector lenders. QTC can only enforce security in circumstances where an insolvency event has occurred, a change in control occurs or the private sector financiers have not instructed the security trustee to enforce the securities within three months of being entitled to do so.

In some circumstances, the banks can also take out the QTC debt and vice versa. QTC will also only be entitled to attend certain meetings called by the security trustee during enforcement and will not be entitled to vote at these meetings.

South East Queensland Schools
Status: Financial close 29 May 2009
Description: $255.3 million supported debt model financing for the building and maintenance of seven new schools
Sponsor: Aspire Schools (Commonwealth Bank of Australia; Leighton Contractors; Broad Construction Services)
Financial adviser to Aspire: Commonwealth Bank of Australia
Mandated lead arranger: National Australia Bank
Participating bank: Commonwealth Bank of Australia
Financial adviser to Queensland State Government: Ernst & Young
Sponsor legal counsel: Minter Ellison
Lender legal counsel: Allens Arthur Robinson
Technical adviser: Altus Page Kirkland
Insurance adviser: Marsh
Tax, accounting and financial model auditor: KPMG
Legal advisor (design & construction): Philips Fox
EPC: Broad Construction Services (QLD) Pty Ltd