The ambitious Flemish schools deal is significant for reintroducing a formal underwriting process to the European PPP market, and proved to be unexpectedly popular in syndication. Its unusual structure serves the heterogeneous Flemish school system whilst distributing risk in an attractive way for both sponsors and banks.

To avoid the high bid costs of multiple small projects, while maintaining com­peti­tion between medium- and small-sized contractors, the government kept a large tender for financial sponsors separate from a series of much smaller tenders for construction. The smaller tenders will take place on a rolling basis for bundles of between four and six schools.

The Flemish Community’s government launched the tender in April 2007 and 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 was chosen as the preferred bidder in Decem­ber with the consortium of Meridiam, NIB Capital Bank and Barclays as the reserve bidder. As the crisis unfolded the grantor asked bidders to reaffirm their bids.

It confirmed Fortis Bank and Fortis Real Estate as the preferred bidder in May 2009. In the same month the merger between BNP Paribas and Fortis was finalized. BNP, keen to develop its new home market of Belgium, gave the project its full support. BNP Paribas Fortis and Fortis Real Estate have a 75%-minus one vote stake in the project, and the Flemish authorities own the remaining 25%-plus one vote shareholding.

Contracts were signed in August 2009, with the bank group enlarged to include KBC, Dexia and AG Insurance. SMBC joined near financial close. Political uncertainty created pressure to close the deal before the Belgian general election. Two parallel signings – for construction debt and long-term debt – took place at the last minute on 10 June, the day of the election.

Construction is financed using a Eu700 million ($963 million) 6.5-year revolver. BNP Paribas contributed Eu250 million, KBC and Dexia Eu125 million each, and SMBC and AG Insurance Eu100 million each. The revolver is priced at 300bp over Euribor with a 150bp upfront commitment fee.

The facility agreement was also signed for the Eu1.5 billion 30-year debt, underwritten by BNP Paribas Fortis but with a AA+-rated government guarantee. The loan carries a 100bp margin over 6-month Euribor and a six-year grace period.

Each school will have a separate design-build-finance-main­tain contract, and when completed its draws on the revolver will be refinanced with long-term debt. The structure, therefore, automatically refinances 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 Eu161 million of equity in the construction financing, 75% of which is as a subordinated loan from the shareholders.

The direct 100% guarantee of the long-term facility means it is not subject to solvency regulations. The government is also providing a guarantee to back the payment obligations of the school boards and will assume the long-term debt if after seven years it cannot be refinanced at a reasonable cost.

Refinancing using bonds, banks, or a combination of the two, can be attempted from around year four. 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.

A design-build-finance-maintain holding company sits above the project companies and administers the programme. The DBFM holding company selects an archi­tect for each bundle of schools and pre-selects a pool of build-maintain contractors to bid for each project.

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 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.

Official syndication launched in July, a month after financial close. BNP Paribas Fortis invited around 15 banks into the process and by September eight interest­ed lenders came forward. Fortis planned for ticket sizes of Eu25-50 million, Eu50-75 million and Eu75-100 million. Bank appetite increased dramatically, however, by the end of the third quarter and some banks that had registered interest in Eu25 million tickets were now putting in for Eu100 million.

The main impetus behind this demand was pricing. The 300bp margin was set at the height of the crisis, and it became clear that new school PPPs would be priced 200-225bp. It was also initially thought that banks might be wary of the complexity of the deal, but this was counterbalanced by its artful structure and risk allocation.

Syndication was 3.5x oversubscribed, so ticket sizes were reduced to Eu37.5 million and Eu18.75 million. The larger ticket size carried MLA status and was taken by ING, BIIS, ABN Amro and CFF/Caisse d’Epargne. LBLux, Kommunalkredit, NIBC and Credit Agricole all took the smaller pieces. After signing in December, BNP Paribas Fortis 0now holds Eu125 million, Dexia and KBC Eu100 million each, and SMBC just Eu50 million. AG did not participate.

DBFM Scholen van Morgen
Status: Financial Close 10 June 2010
Size: Eu1.65 billion
Location: Flanders, Belgium
Description: PPP concession for up to 211 schools
Sponsors: BNP Paribas Fortis/Fortis Real Estate (75%) and the Flemish authorities, AGIOn and PMV, (25%)
Revolver lead arrangers: BNP Paribas Fortis; KBC; Dexia; SMBC; AG Insurance; ABN Amro; ING; BIIS; NIBC; Caisse d’Epargne/CFF; Credit Agricole; Kommunalkredit; Banque LBLux.
Long-term debt lead arranger: BNP Paribas Fortis
Legal adviser to the sponsors: Linklaters
Legal adviser to the lenders: DLA Piper
Legal adviser to the Flemish government: Stibbe
Financial adviser to the Flemish government: PwC
Technical adviser to the lenders: Arup
Insurance adviser to the lenders: Aon
Financial model auditor: PKF