The South Tyne & Wear Waste Partnership project was the first project financed UK waste PFI deal to reach financial close in almost two years. The project overcame problems presented by the tough economic climate, including the departure of RBS and Bank of Ireland from the sponsor and bank groups, and the insolvency of the original EPC contractor, to reach financial close just six months after the announcement of preferred bidder.

The South Tyne & Wear Waste Partnership is a joint PFI procurement between Gateshead, South Tyneside and Sunderland Councils in the North East of England. The contract involves the design, build, financing and operation of an energy from waste plant under a 28 year PPP concession. The plant has the capacity to treat 256,000 tonnes of waste p.a. (generating 18MW of electricity) and will contribute towards the UK’s landfill diversion targets under the EU Landfill Directive. In addition to the main facility, the consortium will design and build three waste transfer stations in each council area of Gateshead, South Tyneside and Sunderland.

In September 2010 the South Tyne and Wear Waste Management Partnership selected a consortium led by GDF Suez subsidiary SITA as preferred bidder for the project. The original consortium comprised SITA (45%), Catalyst Lend Lease (35%) and Royal Bank of Scotland (20%), supported by offers of debt from Natixis, BBVA, Credit Agricole and Bank of Ireland.

However, under pressure from the effects of a taxpayer funded bailout, RBS agreed to sell a £3.8 billion project finance portfolio to BTMU as part of its decision to scale back its ‘non-core’ assets in late 2010. Despite closing the Northumberland Waste PFI with SITA in 2006, RBS withdrew from both the equity and debt in the project shortly afterwards. Bank of Ireland, at that point a traditional lender on waste deals, also started selling off its overseas project finance business in April 2011, and also left the deal. AE&E Inova, formerly Von Roll Inova, the original EPC contractor was also in the midst of being sold.

Despite these departures, Japanese trading company Itochu replaced RBS in the sponsor group, and took on its 20% stake through its subsidiary I-Environment Investments. The three remaining banks, Natixis, BBVA and Credit Agricole, each increased their stakes in the project’s £233 million debt package. And Hitachi Zosen Inova completed its purchase of AE&E Inova from A-Tec and replaced it as EPC contractor.

The project reached financial close in April 2011 within six months of preferred bidder appointment – one of the shortest timeframes from preferred bidder to financial close for a project financed UK waste deal. “There was a willingness on all sides to get involved in the project,” says Amanda Padfield, Principal PPP Project Manager, SITA UK “And with the experience of the parties involved and planning permission assured there was an understanding that the project was secure.”

The debt package is compromised of a £177 million 26-year term loan, priced at around 300bp over Libor, an £18 million capital contribution bridge and a £5 million change-in –law facility. The term loan leaves a two-year tail to the project’s 28-year concession length, which is split into a three-year construction phase and a 25- year operations phase. The remainder of the £233 million package is a £38 million three-year equity bridge.

The project benefits from £73.5 million in PFI credits, which Defra awarded in 2008, and then gave final approval to after the partnership’s successful presentation of the project’s final business case. The project fared better than other waste PFIs in this regard – a month after a preferred bidder on the project was selected Defra, the UK’s Department for Environment Food and Rural Affairs, withdrew PFI credits from seven local authority-procured waste projects.

As part of the project costs £5 million was set aside as a change in law facility. A common occurrence amongst waste deals as the complex mix of technologies, with different emissions and by- products make the waste sector vulnerable to changes to the regulatory environment.

Waste deals carry more operational risk than more vanilla PFIs such as schools and hospitals. As a result, margins on waste PFIs are higher than their social infrastructure counterparts. The current project was competitively priced with a margin of 300 bp over Libor.

Syndication of the £236 million 26-year senior secured facility was closed in August with KfW, SMBC and Mizuho, each taking a Eu30 million ticket. Pricing on the deal was between 280bp and 310bp over Libor with participation fees of 125bp. “The syndication process was relatively straightforward,” says Padfield “due to the robustness of the financing in the place, the strength of the project at hand and a general willingness on all sides to keep the project moving.”

South Tyne & Wear Waste Partnership
STATUS: Financial close 20 April 2011
TOTAL PROJECT COST: £233 million
TOTAL DEBT: £238 million (including £38 million equity bridge)
DESCRIPTION: A joint PFI procurement between Gateshead, South Tyneside and Sunderland Councils. The contract involves the design, build, financing and operation of an energy from waste plant under a 28 year PPP concession. The consortium will also design and build three waste transfer stations in Gateshead, South Tyneside and Sunderland.
SPONSORS: SITA UK, Lend Lease, ITOCHU Corporation
MLAS: BBVA, Credit Agricole, Natixis
PARTICIPANTS: Mizuho, KfW, SMBC
SPONSOR LEGAL COUNSEL: Allen & Overy
LENDER LEGAL COUNSEL: Linklaters
COUNCILS’ LEGAL ADVISOR: Pinsent Masons
TECHNICAL ADVISORS LENDERS: Mott MacDonald
FINANCIAL ADVISERS: Deloitte (Councils), RBC Capital Markets (Sponsors) CONSULTANTS: Mott Macdonald, Mazars
EPC: Hitachi Zosen Inova