The Canadian province of Alberta has been a sparing user of PPPs. Aside from two packages of schools, with a third on the way, it has confined its use of PPP to the roads that ring the province’s capital, Edmonton, and largest city, Calgary. Robust oil and gas revenues allow the province to maintain unforgiving value-for-money criteria.

Sponsors always claim that a large and visible pipeline helps stimulate competition between debt and equity providers for concessions, and lower availability payments, and Ontario’s success in driving down the cost of PPP might bear out this argument. However, the lowest spread recorded until recently for a Canadian PPP has been the Federal government’s CSEC accommodation project. The record holder is now the financing for the north-eastern section of the Anthony Henday drive around Edmonton.

On 8 May, the bookrunners on the C$535 million issue for project company Capital City Link General Partnership priced the bonds, due 2046, at 187bp over the equivalent government of Canada bond. The CSEC bonds priced in January 2011 at 200bp over the benchmark. Standard & Poor’s rated the Henday NE bonds A-, while DBRS rated them A (low). While PPP projects with triple-B ratings can access the Canadian bond market, single-A remains the pricing sweet spot.

The 27km section of the road is the third of the drive’s sections to come to market as a PPP. Bilfinger Berger closed on the debt financing for the C$1.42 billion north-western section of the road in 2008, setting the pre-CSEC pricing benchmark, and ABN Amro closed on the C$500 million south-east section in 2005.

The project sponsors are ACS (through ACS Infrastructure Canada and then ACS NEAH Partner, 25%), Hochtief (through Hochtief PPP Solutions and then HOCHTIEF NEAH Partner, 25%) and Meridiam (through MNII Canada I and then Meridiam Infrastructure NEAH ULC, 50%), while the design-build contractor for the project is a joint venture of Hochtief subsidiary Flatiron, ACS subsidiary Dragados, Aecon and Lafarge. The road’s operator will be Netherlands-headquartered Volker Stevin, which carries out similar services on several of Alberta’s existing roads, with Lafarge, which operates the south-east Henday section.

The province issued a request for qualifications on 2 March 2011, and shortlisted three bidders by 9 May 2011: the eventual winners, as well as a Macquarie- and Kiewit-led grouping, and a consortium of SNC Lavalin and Graham. It issued a request for proposals to the three, and closed it in March 2012, and by the end of that month the ACS/Hochtief/Meridiam grouping had emerged as the lead bidder. According to the province its comparable cost of delivery using traditional procurement was C$2.18 billion, with the winning bid coming in at C$1.8 billion, second-placed bid coming in at C$2.03 billion, and the last-placed bidder at C$2.22 billion.

The three members of the winning consortium had not won a road PPP in Alberta before, although both Meridiam and Hochtief have management that have worked on earlier road PPPs, and Hochtief is the lead sponsor for Alberta’s second schools PPP bundle. The schools financing, which closed in April 2010, was a C$92 million, 20-year bank loan, led by Bank of Ireland and SMBC.

The concession contract requires the project company to build the road by 1 October 2016, and no later than a year after that. The design-build-finance-operate contract includes 53 months of construction and 30 years of operation, providing for a minimal tail beyond the term of the bonds. Construction is scheduled to start in June.

The concession agreement has standard risk allocation for the province: Land acquisition, archaeological, aboriginal claims, industry strike and force majeure remain with the grantor. But, crucially, Alberta does not allow the project company to alter the spread on the debt after the bidding stage. The sponsors and underwriters retain both the upside and downside from any variations, motivating them to get the slimmest spread possible.

Alberta’s triple-A rating tends to allow its PPP bonds to price roughly 15bp inside Ontario’s. It is no coincidence that Alberta and the Canadian federal government both have triple-A ratings, both insist that project sponsors commit to spreads, and trade the honours for lowest bond pricing. The spread that the Henday NE sponsors offered to the province is not known, though the financing initially launched at a spread of 190bp.

Given banks’ struggles to raise competitive funding for project finance loans, the debate between bank and bond products is starting to look rather archaic. There are very few instances now where banks can compete, especially if, as on Henday NE, a province will provide capital contributions to projects as progress payments during construction rather than a substantial completion payment.

The triple-B rated project bond market, while increasingly attractive, does not yet tempt sponsors that can structure a financing to reach single-A. Reaching that level usually requires providing increased support on the construction package. “We had to assemble a 13.5% letter of credit to get the deal to single-A,” said one source close to the financing, “but the benefit in terms of spread is 25-30bp.”

The Anthony Henday drive will not provide any more PPP concessions, since three of its four sections are being procured as PPPs, and one was delivered conventionally. There remains one section of the Stoney Trail round Calgary to deliver – the south-west section – and the province is considering how best to upgrade the road between Edmonton and Fort McMurray. The development of the province’s oil sands industry has placed greater-than-expected demands on that route. It has also given it plentiful revenues, and therefore other options for how to procure an upgrade. 

Capital City Link General Partnership
Status: Priced 8 May 2012
Size: C$1.539 billion
Description: DBFO concession for 27km of ring road around Edmonton, Alberta, Canada.
Grantor: Alberta Transportation
Progress payments: C$925 million
Sponsors: ACS (25%), Hochtief (25%) and Meridiam (50%)
Equity: C$73 million
Bookrunners: CIBC (left), National Bank Financial
Selling agents: RBC, TD
Debt: C$535 million
Maturity: 2046
Interest on proceeds: $6 million
Sponsor legal counsel: Davis
Lender legal counsel: McMillan
Lender insurance adviser: Intech
Lender technical adviser: BTY

The Anthony Henday sections