The Tramlink Nottingham consortium led by Meridiam Infrastructure closed the Nottingham Express Transit Phase Two (NET2) project financing on 15 December 2011, whilst simultaneously replacing the Arrow Light Rail consortium, which had built, and was operating, the first phase NET1 of the citys tram network.

The £590 million ($929.74 million) project will result in two new lines being added to the network, which will be extended by a total of 17.5km. Completion of the lines to the suburb of Chilwell and the village of Clifton is scheduled for the final quarter of 2014 and the lines are expected to carry ten million passengers a year.

The concession will last for 22 years and three months and project income will be derived equally from fares and availability payments. Penalty clauses involve deductions from availability payments in the event of a loss of service.

Meridiam is the arms-length infrastructure fund of Credit Agricole, which agreed to provide debt financing for the project along with BBVA, Bank of Tokyo-Mitsubishi UFJ (BTMU) and Royal Bank of Scotland. BTMU joined the financing towards the end of the summer, after the basic structure of the loan was agreed by the other three lenders.

The deal comprises a senior 18-year loan of £210 million, split equally between the four banks. The tranche is priced at 290bp over Libor for the first three years, with step- ups of 10bp roughly every five years to 340bp at maturity. The banks increased margins a few weeks before the December close to reflect the wider market: The deal closed just before the European Central Bank flooded the banking system with Eu490 billion in cheap three-year loans.

The projects base case has a minimum annual debt service coverage ratio around the 1.35x mark, while the minimum loan life average ratio was in the region of 1.4x.

All four lenders also provided 25% each of a £100 million construction bridge, which was priced at 280bp over Libor. And the European Investment Bank is putting up a £110 million loan with an 18-year maturity and fixed rate of interest.

Risks related to passenger demand numbers were mitigated by the planned use of Line One revenues to service part of the projects debts. The 14km line between the city centre and the Nottinghamshire town of Hucknall was opened in 2004 and carries 10 million passengers a year.

Passenger demand on Line One has held strong throughout the recession, increasing lender comfort, while future demand was expected to rise in tandem with GDP growth. The projects base assumption for fare increases was for prices to rise in line with retail price index (RPI) inflation although the consortium is free to set fare prices.

Meridiam contributed 30% of the £88 million equity and 60% of £20 million in mezzanine debt, while infrastructure management company OFI IntraVia provided 20% of the equity and the remaining 40% of the mezzanine. Co-sponsors Keolis, Alstom, Vinci and Wellgrade contributed 12.5% each of the equity. The sponsors had the option of investing equity upfront or at the end of the construction period with the backing of letters of credit. The financing of the project was also marked by the absence of a ramp- up reserve account and the payment of sub-debt interest into an escrow account during the construction period.

The inclusion of Wellgrade, which runs a bus operation in Nottinghamshire, was an important ingredient of the consortiums success, because the city council wants to create an integrated transport policy. The same rationale precluded the possibility of Arrow continuing to operate the first line. The council terminated the contract shortly before financial close for the second phase of the network took place.

Arrow Light Rail consortium, which comprised Innisfree, DSD Projects, Adtranz, Carillion, Transdev and Nottingham City Transport, also bid for the project but Tramlink Nottingham was named preferred bidder in March of last year. Arrow lost out because of pricing considerations and not as a result of questions related to its performance, according to sources familiar with the bidding process.

Arrow closed the financing of the original line in May of 2000. The main £186 million tranche of the deal was priced at 100- 130bp over Libor and had a 25-year tenor. The total debt amounted to £200 million. Under the terms of the NET2 project deal, the pre-existing financing is replaced in its entirety and the original loan is refinanced at par.

Tramlink Nottingham
STATUS: Financial close 15 December 2011
TOTAL PROJECT COST: £590 million
DESCRIPTION: Two tram lines totalling 17.5km from Nottingham city centre to suburb of Chilwell and the village of Clifton
SPONSORS: Meridiam (30%), OFI IntraVia (20%), Keolis (12.5%), Alstom (12.5%), Vinci (12.5%) and Wellgrade (12.5%)
EQUITY: £88 million
MEZZANINE: £20 million
DEBT: £420 million
LENDERS: BBVA, Bank of Tokyo-Mitsubishi UFJ, Credit Agricole, Royal Bank of Scotland
PARTICIPANT LENDER: European Investment Bank
SPONSOR LEGAL COUNSEL: CMS Cameron McKenna
LENDER LEGAL COUNSEL: Hogan Lovells
SPONSOR TECHNICAL COUNSEL: Steer Davies Gleave
LENDER TECHNICAL COUNSEL: Halcrow
SPONSOR INSURANCE ADVISOR: JLT
LENDER INSURANCE ADVISOR: AON
SPONSOR FINANCIAL ADVISOR: KPMG