Birmingham Highways was the first highway maintenance PFI to close after the crunch and the largest UK local government PFI outside of London. It closed in the last gasp before the UK’s general election, with a six-strong bank club providing competitively priced long-term debt. The deal creates a template for the next wave of highway maintenance PFIs, several of which are currently in tender.

The concession was first put out to market in 2004, and four bidders were initially in the running for the scheme: Amey; Atkins/EDF; Balfour Beatty/Mouchel Parman and Birmingham Street Services (Vinci, Amec and Laing O’Rourke). The project was delayed by the arrival of a newly-elected Liberal Democrat-controll­ed city council, which opposed the PFI procurement route.

The initial estimates for the project’s cost were too low, meaning that the allo­cation of £360 million ($579 million) PFI credits sup­porting the project was insufficient. To this end, Birmingham Council man­aged to obtain an additional £248 million credits in 2007 – by which point Balfour Beatty/Mouchel Parman and Atkins/EDF had both dropped out of the process.

The onset of the crunch further delayed the project, and in 2008 Birmingham City Council sought assurances from the two bidders that they would still be able to raise sufficient funding. Amey was select­ed as preferred bidder in August 2009, at which point it started the funding com­petition for the project.

The absence of any post-credit crunch template for the financing was a significant obstacle in negotiating terms. The only real precursor – Portsmouth’s PFI – closed in much more forgiving credit conditions. The complexity and breadth of Birmingham’s road network led to equally wide-ranging due diligence and risk assessment. The banks also wanted a 25-year credit view of Amey and the assurance that if Amey collapsed, an alternative provider could be brought into the project.

A significant source of tension was the banks’ use of the M25 as a comparative risk analysis model; a comparison that Amey’s financial adviser PwC insisted was not applicable. The now disbanded UK Treasury Infrastructure Finance Unit (TIFU) shadowed the financing process, and attended meetings as a silent partner to keep abreast of developments in case it needed to step in.

At the end of April the then shadow transport secretary Theresa Villiers gave a speech in Birmingham promising that the highways project would be reviewed on a value for money basis by a Conservative government. This placed an urgency to close financing before the general election. The financing got away just in time, and was put into the swaps market at 4:30pm and placed at 5pm on 6th May, as the market closed, and three hours before voting closed.

Bank of Ireland, Dexia, NIBC, Natixis, Nationwide and Lloyds provided £248.375 million of 23.5-year senior debt, initially priced at 250bp over Libor. After fifteen years this margin increases to 275bp, in order to encourage refinancing. The senior debt is accompanied by a 5-year £68.56 million equity bridge, £10 million of which constitutes a letter of credit. The margin on this bridge is lower, at 175bp, and both debt tranches had a 150bp commitment fee. The amortisation is sculpted, and the minimum debt service coverage ratio is around 1.25x.

The swaps were distributed on a pro rata basis and were blended rather than differentiated between the two debt tranches. The interest rate was locked in at just over 4% and the swap rate was 22bp. Natixis was technical bank, NIBC modeling bank and Bank of Ireland and Lloyds were documentation banks.

Lloyds came into the deal in January and provided £70 million, as well as agreeing with Amey to provide around one third of the equity. Dexia and Bank of Ireland came in for around £55 million each, and Natixis, Nationwide and NIBC each provided around £45 million. Amey originally brought eight banks into the deal, but BNP Paribas, Credit Agricole and WestLB dropped out after they could not reach mutually agreeable terms regarding coverages, among other things. The three banks were pushing for a 1.4x average DSCR, a similar level to that of the M25. Lloyds’ entry into the bank club in February, however, meant that these demands could be disregarded, as the UK part-nationalised bank was willing to supply the majority of the bank debt with lower coverages and margins.

Significantly, the bank debt has been informally syndicated since financial close, by bringing in ING, KfW and HVB into the now nine strong bank club. Similarly, Amey has sold half of its equity stake in the project to Equitix, a fund specialising in PFI/PPP.

The 25-year contract has an overall value of £2.7 billion, and covers 2,500km of roads, around 100,000 street lights and 850 highway structures and bridges across the city. There is also flexibility for new roads to be added to the network. The first five years are set aside to clear a backlog of outstanding work and bring the maintenance standard up to an independently assessed level, rated using the Network Condition Index. This standard then has to be maintained for the remaining 25 years.

As a result, the first five years are the most capital intensive, and the period is split into 10 six-month performance milestones. The first milestone was hit successfully in December, in spite of unexpectedly severe weather conditions.

Keith Cottrell, managing director for ventures at Amey, believes that Birmingham Highways has created “a template for how PFIs can be shaped to meet the long-term management requirements of complex urban transport networks.” Out of the three pipeline highway maintenance PFIs, Amey has been shortlisted on the Sheffield project, with support from four of Birmingham’s six initial MLAs, and is also pursuing the Isle of Wight contract.

Birmingham Highways
Status: Financial close 6 May 2010
Description: £317 million financing for 25-year, £2.7 billion highway maintenance contract.
Sponsors: Amey (66%), Lloyds (33%)
Mandated lead arrangers: Lloyds (documentation); Bank of Ireland (documentation); Natixis (technical); NIBC (modelling); Nationwide; Dexia; ING; KfW; HVB.
Financial adviser to Birmingham City Council: Deloitte
Financial adviser to sponsors: PwC
Legal adviser to sponsors: Wragge & Co
Legal adviser to the Birmingham City Council: DLA Piper
Legal adviser to lenders: SNR Denton