The £1.15 billion (US$2.2bn) contract for the redevelopment, management and operation of facilities at the Northwood Headquarters site outside London stands out as a deal that signals the continued progress of UK Ministry of Defence (MoD) PPP programme

The Northwood deal was swiftly followed by the close of the MoD's London real estate deal MoDEL on 3 August - which involved a capital requirement of £180 million (US$340m) - and takes the form of something more akin to a revolving facility.

The Northwood and MoDEL deals, of course, follow hot on the heels of the close earlier this year of the £2.5 billion Allenby Connaught MoD accommodation project, giving direction to the defence projects that was badly needed and that Nick Prior, head of the MoD project finance unit (PFU) was brought on to achieve.

The 25-year contract for Northwood was finalised with SPV Eastbury Park - the 50:50 joint venture between Carillion and HSBC.

The project sees the redevelopment of the 43-acre site at Northwood, Middlesex, the home of the Permanent Joint Headquarters (PJHQ) - which runs all UK military operations worldwide, Fleet and Nato HQ.

The contract will see the construction of a number of new buildings, the refurbishment of some existing structures and the demolition of surplus buildings. This will be achieved through a phased process over a five-year period.

At the time of financial close, defence minister Tom Watson said: established a cost-effective, long-term solution to support the UK's national operational defence headquarters, that will also address a number of deficiencies associated with this ageing site.'

PJHQ is responsible for all UK involvement in overseas operations as well as maintaining the Permanent Joint Operating Bases ranging from the South Atlantic to the Indian Ocean.

 

The transaction

MONOCO (a Mowlem consortium) was awarded preferred bidder on the Northwood project in July 2005, but then Mowlem was taken-over by Carillion in 2006 and it was swallowed up by the new owner.

This was rather a happy turnaround for Carillion as it had bid against Mowlem in the Northwood project and in the Allenby Connaught deal. Mowlem won the Northwood project and Carillion picked up the Allenby one.

By taking over its erstwhile rival, Carillion ended up - in one fell swoop - in charge of two of the UK's most prestigious MoD deals that were closed in the first seven months of 2006.

In the Northwood deal, Carillion Defence will provide both new works and refurbishment of existing buildings, and the services element of the contract. Planning permission for the scheme was granted by the Three Rivers District Council in February 2006.

KPMG picked up the consortia financial advisory role in May 1999, acting for Mowlem on its prequalification for Northwood deal right through the deal process to Carillion's takeover and the eventual financial close at the end of July 2006.

This involved competing capital markets and conventional project finance bank debt and ultimately selecting Depfa Bank to provide around £200 million (US$378m) of term loan, standby and equity bridge facilities.

KPMG Corporate Finance partner Mike Harlow led the advisory team. He says: 'It has taken a long time for this procurement to reach financial close, but the Mowlem solution was always very strong and it is satisfying to know that this can now be put into action.'

Carillion and HSBC closed the project which is expected to generate some £880 million (US$1.7bn) of revenue for Carillion over the 25-year concession contract, including construction, support services and Carillion's share of revenue in the joint venture, special purpose company.

The JV partners will each invest some £10 million (US$18.9m) of equity in the project.

Carillion will carry out a £150 million (US$283m) construction programme over a five-year period and will also provide a wide range of support services, worth in the region of £440 million (US$832m) over the contract period.

Service delivery started immediately and includes domestic services, estate management, document production and handling stores, transport and waste disposal.

Carillion chief executive John McDonough says: 'This contract, which closely follows Carillion's success in securing the £12 billion Allenby Connaught project, reinforces our position in the PPP market and also as a major supplier in the defence sector.'

 

Financing

Depfa is financing the deal as sole lead arranger, providing around £200 million (US$373.6m) of term loan, standby and equity bridge facilities.

The SPV - Eastbury Park - is providing £20 million (US$37.3m) in equity, of which Carillion and HSBC will each invest £10 million (US$18.7m).

The total value of the project is £1.15 billion (US$2.15bn), which represents the indexed value of the unitary payments it expects to make to the SPV over the life of the concession contract.

John Kirwan, head of UK PPP at Depfa, says: ''We were involved in this very important project from the outset. It was a high-profile project for Depfa and ground-breaking in many ways.

'Northwood was also important for us because it built on our relationship with Carillion. We took the MLA role on Carillion's Oxford Radcliffe deal - the last bank-financed hospital PPP deal that Carillion closed.

'This deal also underlies our strong position in the PFI market and our desire to do more.'

Depfa was advised by Norton Rose, technical advisers Currie & Brown, an insurance team from Aon and Operis was responsible for the  model audit.

As to price of debt, sources close to the deal say it was 'within 1 per cent you would normally see in a deal like this'.

 

Legal

Carillion was advised by Pinsent Masons, Denton Wilde Sapte acted for Eastbury Park (the project company), Norton Rose for the funders and Wragge & Co for the MoD.

Pinsent Masons partners Mark Sanderson and Annie Kilvington led the teams advising Carillion Services and Carillion Construction respectively and the project was closed within three months of the close of the Allenby Connaught where Pinsent Masons also acted for the MoD.

Sanderson says: 'It has been rewarding to close another high profile defence sector accommodation project with Carillion and the whole team has had to respond to some challenging timescales to ensure that financial close was reached before the summer break.

'All advisers will - I am sure - concur that the Carillion core values of collaboration and openness were strongly to the fore in the approach adopted to completing this challenging project on time and to budget.'

Kilvington adds: 'By including within our team solicitors with in-depth and recent experience from the Allenby Connaught project, we were able to offer a unique value-added service to the client: no reinventing the wheel, just pragmatic, commercial advice that was right up to date with market practice.'

PFI associate Tony Cheema led the Wragges team working alongside partner Michael Whitehouse and John Quigley, director of the Northwood Development & Change Programme.

'Northwood serves a number of functions, including both MoD Tri-Service and NATO command centres, making the site a very complex one to renew, manage and operate.'

Wragges has an on-going relationship with the MoD and in 2005 was re-appointed to its panel of preferred legal advisers. It is currently advising the MoD on its flagship project for the Royal Navy - the £3 billion (US$5.7bn) plus project to design, build and maintain two new aircraft carriers. Other defence work this year has included acting for Lex Defence on a £110 million transport deal as part of the £8 billion Allenby-Connaught project.

 

Conclusion

 

The close of the Northwood deal comes as a shot in the arm to the MoD PFU where Nick Prior has spent the best part of the last two years shaking up the market to get deal flow moving.

This year has seen this labour bear fruit with the close of Allenby Connaught, MoDEL and Northwood. It now remains to be seen how many more can be pushed through in the coming few months.

Carillion was lucky to get in on this deal through its taking over Mowlem, thereby getting it in on two major MoD deals to have closed this deal so far. The deal also serves to nail down Depfa's snug relationship with Carillion.

 

The project at a glance

Project Name	MoD Northwood Headquarters PPP
Location	Northwood, Middlesex, UK
Description	Contract for the redevelopment, management and operation of facilities at the Northwood Headquarters site to the west of London
Sponsors	Carillion HSBC Infrastructure Fund Management
Operator	Carillion
Borrower	Eastbury Park
Project Duration (Including construction)	25 years which started immediately on deal close
Construction Stage	5 years
Total Project Value (duration)	£1.15 billion (US$2.2bn)
Total Project Value	£220 million
Total equity	£20 million (US$38m)
Equity Breakdown	50:50 Carillion and HSBC providing half each
Total senior debt	£200 million
Senior debt breakdown	Term loan - £175m (US$332m) Equity bridge - £20m (US$38m) Standby - £5m (US$9.5m)
Debt:equity ratio	90:10
Mandated lead arrangers	DEPFA Bank
Legal Adviser to sponsor	Denton Wilde Sapte
Financial Adviser to sponsor	KPMG
Legal adviser to banks	Norton Rose
Legal adviser to MoD	Wragge & Co
Legal adviser to contractor	Pinsent Masons
Technical adviser to bank	Currie & Brown
Insurance adviser to bank	Aon
Model auditor for bank	Operis
Date of financial close	31 July 2006