Rideau Transit Group closed a C$440 million ($438 million) financing on 14 February 2013 for the C$2 billion Ottawa light-rail concession. The financing is the most complex transport project to be procured in Ontario, and highlights the continued relevance of bank lenders on PPPs with large amounts of construction risk.

The package combines a five-year revolving credit facility with a long-term private placement, both of which were aggressively priced. National Bank underwrote the C$225 million unrated fixed-price private placement and joined Scotiabank, Bank of Tokyo-Mitsubishi UFJ and Sumitomo Mitsui Banking Corporation in the C$215 million revolver. Scotiabank was financial adviser to Rideau, a consortium led by ACS that also includes SNC Lavalin and EllisDon.

The combination of the two debt sources reflects the competitive dynamic in the Canadian market. Domestic lenders won’t lend beyond 10 years – if that – but this limit is not a problem in Canada, because it boasts one of the most mature project bond markets anywhere. Canadian institutional investors were eager to buy the 34.5-year Ottawa light-rail paper, which has only a short tail before the end of the 35-year concession. The private placement has an average maturity of 22 years and priced at 230bp over the 30-year government of Canada bond.

But bank debt is still the cheapest and most flexible short-term funding source, despite efforts on the part of Canadian underwriters to brighten the appeal of short-term bonds. Rideau’s analysis of debt sources during bidding bore this out: bank debt is cheaper than short-term bonds and a revolver is even cheaper than a term facility. The Ottawa revolver was priced at 145bp over CDOR on drawn amounts and then swapped into fixed-rate. The revolver will be repaid with milestone payments during construction.

Sun Life financial came into the financing by December 2012, when Rideau won the design-build-finance-maintain concession. It was lead provider on National Bank’s underwritten private placement and is said to have bought more than half of it. The lead underwriter brought in another six insurance companies nearer to the concession contract’s 14 February deadline for the sponsors to reach financial close.

Sun Life and National Bank have worked together before on private placements. In 2012, National Bank underwrote a C$250 million 21-year private placement for Enerfin Energy’s 100MW l’Érable wind project in Quebec, with Sun Life again as lead provider.

Besides ACS, SNC and EllisDon, the three leads, the Rideau consortium also includes Veolia, Adamson, Fast + Epp, MMM Group, IBI, DR Sauer, Hatch Mott MacDonald, Sereca and Thurber Engineering. Rideau will contribute its equity at the end of construction, and the sponsors are putting up letters of credit to back their contributions.

The concession involves building a 12.5km, 13-station light-rail line, called the Confederation Line. The line, which must be operational by early 2018, will replace Ottawa’s existing bus rapid transit network and includes a 2.5km tunnel and three underground stations. For the tunnel, Rideau accepted much of the geotechnical risk of its construction – which will probably become standard in Ontario transit projects, including the proposed Eglinton line in Toronto. Rideau will also supply and maintain an initial fleet of 34 vehicles, provided by Alstom. The consortium also will widen Highway 417 under a build-finance contract.

Canada’s federal government and the province of Ontario are each contributing C$600 million, while the city of Ottawa will provide C$479 million. Ottawa will meet its contribution with transfers from a federal fuel tax fund (C$192 million) and provincial fuel tax receipts (C$287 million). The federal government’s contribution will come from the Building Canada Fund.

Rideau Transit Group beat two other shortlisted bidders: Ottawa Transit Partners (Vinci and Acciona with Aecon and Bombardier) and Rideau Transit Partners (Bouygues, Brookfield and fiera Axium with Parsons, Colas Rail and Johnson Controls). ACS was aware that Ottawa light-rail is one of the most high-profile new transit projects in North America – and a likely template for other such projects in Canada and the US – and wanted to take an early lead in winning business, as it had with road PPPs five years earlier.

Infrastructure Ontario helped supervise the bidding process for Ottawa light-rail, and used its standardised proposal documents. But the agency added an unprecedented requirement: a disclosed maximum budgetary constraint – a figure that market observers labelled aggressive. The city of Ottawa, and not the province, will own the light-rail project, marking the first time that Infrastructure Ontario advised on a project that the province would own. The city retains project oversight and will reap the benefit of any potential refinancings. 

Rideau Transit Group
STATUS
Closed 14 February 2013
SIZE
C$2 billion
DESCRIPTION
A 12.5km, 13-station light-rail line, dubbed the Confederation Line, in Ottawa, Ontario
CONSORTIUM MEMBERS
ACS, SNC-Lavalin, EllisDon, Veolia, Adamson, Fast + Epp, MMM Group, IBI, DR Sauer, Hatch Mott MacDonald, Sereca, and Thurber Engineering
DEBT
C$225 million unrated fixed-price private placement and a C$215 million revolving credit facility
SPONSOR fiNANCIAL ADVISER
Scotiabank
LONG-TERM DEBT UNDERWRITER
National Bank
REVOLVING CREDIT LENDERS
National Bank, Scotiabank, BTMU, SMBC
SPONSOR LEGAL COUNSEL
Davis
LENDER LEGAL COUNSEL
Torys