In less than three years the Flemish government has established itself as one of the more innovative PPP grantors. For the Liefkenshoek and Brabo transport PPP deals, it provided a refinancing guarantee to soothe bank fears over the cost of long-term funding. Now the Flemish government has provided a suite of guarantees – including a refinancing guarantee – for an ambitious Eu1.5 billion ($1.98 billion) schools programme. The programme could involve building 211 new primary and secondary school buildings covering around 700,000m2 over the next six years.

The deal is also significant for reintroducing a formal underwriting process to the European PPP market and for the unusual way it was structured. The government wanted to avoid the high bid costs of multiple small PPP projects but maintain competition between medium- and small-sized contractors. So it conducted a large PPP tender for financial sponsors, and kept this separate from a series of much smaller tenders for construction, which will take place on a rolling basis for bundles of between four and six schools.

The sponsors of the schools programme are BNP Paribas Fortis and Fortis Real Estate, which together have a 75%-minus one vote stake in the project, and the Flemish authorities, which own the remaining 25%-plus one vote shareholding, divided between the agency for school infrastructure, AGIOn, and PMV. Two parallel financings – for construction debt and long-term debt – closed on 10 June.

Structuring lead arrangers BNP Paribas Fortis, KBC and Dexia brought in two other lenders SMBC and AG Insurance for a Eu700 million ($844 million) 6.5-year revolving construction facility. BNP Paribas is contributing Eu250 million, KBC and Dexia Eu125 million each, and SMBC and AG Insurance Eu100 million each. AG Insurance is expected to hold its ticket but the four banks are looking to sell down around Eu250 million.

The lenders receive a flat margin of 300bp over Euribor and the commitment fee is an upfront 150bp. The debt to equity ratio is 90:10. At the same time as the construction financing the facility agreement was signed for the Eu1.5 billion 30-year debt underwritten by BNP Paribas Fortis but with a Flemish government guarantee and a refinancing guarantee at year seven. The loan carries a 100bp margin over 6-month Euribor and a six-year grace period.

Each school will have a separate individual design-build-finance-maintain contract. As each school is completed, the debt drawn from the revolver will be refinanced with long-term debt. The structure, therefore, automatically refinances de-risked projects as construction risk shifts to availability risk.

During the six-year construction period, some schools will be completed and generating availability payments. According to the model, this revenue will go towards the building of further schools (there is a six-year grace period on the long-term debt). There is Eu151 million of equity in the construction financing, 75% of which comes in the form of a subordinated loan from the shareholders.

There are three types of Flemish government guarantee on the scheme:

1) School board guarantee – a guarantee to back the payment obligations of the school boards

2) The main guarantee – a direct 100% guarantee of the Eu1.5 billion long-term facility

3) A refinancing guarantee – if after seven years the long-term facility cannot be refinanced at a reasonable cost the government will assume the debt

The Eu1.5 billion commitment from BNP Paribas Fortis will not be subject to solvency regulations thanks to its benefiting from a AA+-rated government guarantee. Although the facility has a nominal 30-year tenor, if the debt is not refinanced by year seven the Flemish government assumes the debt. The refinancing could use bonds, banks or a combination of the two, and can be attempted from around year 4. Despite the residual amount of construction risk remaining, there should be a sufficient amount of availability payments and track record of successful delivery to make a bond possible.

Contractual structure - click on picture for expanded image

Sitting above the up to 211 project companies for each school is a design-build-finance-maintain holding company that administers the programme, which also benefits from compensation, change of law and termination event provisions.

For each bundle of schools the DBFM holding company selects an architect to design the schools, and retains this architect up to the end of construction. The company also pre-selects a pool of build-maintain contractors, in accordance with the public tender law, and on the basis of technical and financial criteria pre-negotiated with the lenders. When the design for each bundle is complete, the holding company applies for permits and invites build-maintain contractors in the pool to submit offers.

The sponsors contribute all their equity upfront and before the first draw on the construction facility. During operations, the project company can pass on penalties to a defaulting sub-contractor through the classical pass-through mechanism and can replace a sub-contractor if necessary. In addition, the programme benefits from the diversification of a portfolio of schools. An individual event of default is first absorbed by the DBFM company for each bundle but can lead to an early termination of the DBFM contract for this bundle or a partial call on the guarantee, without jeopardising the rest of the programme.

The structure of the deal owes much to the Belgian educational system, which devolves the decision-making to individual school boards, as well as the Flemish government’s will to avoid discriminating between different types of school. The 1959 Schools Law, which is still enforce today, is the cornerstone of the primary and secondary education system in Belgium and gives control over schools and their infrastructure to school boards. Historically the majority of schools in the Flemish Community have been established and run by Catholic institutions and many of the schools’ boards own the school buildings.

There are broadly three types of schools: government-run schools that are completely subsidised; city or province-run schools that are partially or completely subsidised and private schools, mostly run by catholic institutions, which for the primary schools are 70% subsidised and for the secondary schools are 60% subsidised. Under the scheme the remaining 30% or 40% of the availability payment that is not subsidised for these schools is covered by a government guarantee. Around two-thirds of the schools are Catholic schools and cities, provinces or the government run the remaining third.

The financial sponsors did not just compete against each other to keep availability payments low, but also against the traditional procurement method. Each school board is not obliged to opt for the PPP route, although there is currently more than a ten-year waiting list for traditionally-procured school infrastructure.

The Flemish government launched the tender in April 2007 and set a deadline of 17 December 2007 for responses. Four bidders were shortlisted: Meridiam/NIB Capital/Barclays Capital, KBC/Dexia, Fortis Bank/Fortis Real Estate and Cofinimmo. The best and final offer deadline was 1 August 2008, just as the financial crisis entered its worst phase. Fortis Bank and Fortis Real Estate were chosen as the preferred bidder on 17 December 2008 with the consortium of Meridiam Bank, NIB Capital Bank and Barclays as the reserve bidder. As the crisis unfolded the government asked all bidders to reaffirm their bids.

The government confirmed Fortis Bank and Fortis Real Estate as the preferred bidder at the end of May 2009 and contracts were signed in August 2009, with the bank group enlarged to include KBC, Dexia and AG Insurance. SMBC joined near financial close. Around ten banks are thought to be interested in the syndication of the construction facility, with ticket sizes likely to vary between Eu25 million to Eu100 million.

DBFM Scholen van Morgen NV
Status: Closed 10 June 2010
Size: Eu1.65 billion
Location: Flemish region of Belgium
Description: PPP development for up to 211 schools
Sponsors: BNP Paribas Fortis/Fortis Real Estate (75%) and the Flemish authorities, AGIOn and PMV, (25%)
Equity: Eu151 million, of which 75% is sponsor loans
Debt: Eu700 million construction revolver and Eu1.5 billion long-term facility
Revolver lead arrangers: BNP Paribas Fortis, KBC, Dexia, SMBC and AG Insurance
Long-term debt lead arranger: BNP Paribas Fortis
Sponsor legal adviser: Linklaters
Lenders’ legal adviser: DLA Piper
Flemish government legal adviser: Stibbe
Flemish government financial adviser: PwC
Lenders Technical adviser: Arup
Lenders Insurance adviser: Aon
Financial Model Auditor: PKF