Manchester Waste closed this month (April 2009) providing a clear signal to the UK market that PPPs are to be kept on track by whatever means necessary - in this case through EIB and Treasury Infrastructure Finance Unit support.

This transaction stands as a landmark for the PFI sector, lending confidence to sponsors and funders working on the ever-growing pipeline of UK deals, and may prove to be the one to break the logjam.

Closing the largest waste PPP in Europe [Projects Database] in the current climate is no mean feat and the motivation to get the long-delayed project off the ground was evident for all to see.

The deal marks a significant milestone for a number of reasons, not least because it is the first time the Treasury's much-vaunted lending unit has taken a hand.

The financial structure - in which commercial banks eventually lent less than half of the total debt for the project - and the fact that the final package involved two distinct SPVs also made this a unique deal.

Background

The Greater Manchester Waste Disposal Authority (GMWDA) is the largest of six waste disposal authorities established by the Local Government Act 1985. It serves nine boroughs and almost a million households.

In 2005, the GMWDA was awarded a record [at that time] £100 million in PFI credits for what was then slated as a £200 million contract to improve its waste infrastructure and dispose of around 1.5 million tonnes of household waste per annum.

The new facilities, which ultimately involved over 40 sites and several different technologies, will help the UK meet new EU landfill directives. With the GMWDA processing five per cent of the UK's total waste, this was always going to be a problem that would throw up challenges.

A tender was issued in February 2005 with financial close slated for within two years.

The initial response to the tender was positive, with 10 proposals submitted to the GMWDA. Five consortia were shortlisted in June 2005. They were led by all the biggest players:

• Onyx
• Shanks
• SITA
• Viridor / John Laing
• Waste Recycling Group (WRG)

The GMWDA axed Onyx from the shortlist a month later amidst concerns that the original list was too long for a project of this size.

The list was reduced to just two names - SITA and Viridor/John Laing - in May 2006. At this shortlist stage, it was hoped that a preferred bidder would be in place by September 2006 with financial close following in March 2007.

However, the first of several delays hit the project soon after and it was not until November 2006 that the two consortia finally submitted their respective bids.

The situation was further complicated in the New Year when GMWDA announced that it would bring in a separate contractor to handle solid recoverable fuel (SRF) to be derived from the Mechanical Biological Plant (MBT) that formed part of Manchester's waste solution. This meant that the project would effectively have two SPVs working side by side.

Viridor Laing was finally named as preferred bidder in January 2007, with the RBS-backed SITA consortium appointed reserve bidder. Ineos Chlor was also announced as PB to deliver an outlet for the SRF from the MBT facilities.

At this stage the contract was expected to be valued at around £320 million, a figure that would more than double by the time the deal closed.

Banking

With its inception coming during the height of the pre-credit crunch boom years and financial close arriving in the grip of the liquidity crisis, the story of Manchester Waste's financing is a complex one.

When Viridor Laing was announced as preferred bidder in January 2007 two banks - Bank of Ireland (BoI) and NIBC - were in place to underwrite the deal and act as joint MLA, with each envisaging takes of £50 million.

The EIB agreed to provide up to a third of the total debt package, with commercial lenders expected to take up the remainder. The EIB eventually settled on a figure of €200 million for its loan - a figure that would increase as the pound struggled against the euro.

NIBC pulled out of the deal in spring 2008, leaving BoI needing to form a club to find the remaining debt facility in an increasingly difficult market.

The funding gap was partly plugged by the GMDWA that provided a capital contribution of £70 million and a loan of £35 million. This is the first time that an authority had contributed to both the debt and equity side of a PFI deal.

However, BoI was still left with around £300 million in debt to find if the scheme was to get off the ground.

Initial plans were to bring an additional five banks on board. The sponsors and BoI approached a number of banks, with as many as a dozen looking at the deal in detail before backing out.

Eventually three lenders joined BoI as MLAs. They were:

• BBVA
• Lloyds TSB
• SMBC

With each initially committing to a take around £50 million, there was still a gap of around £160 million to fill.

BoI upped its stake to £95 million, with sources close to the deal claiming that the bank was bracing itself to take on the remaining debt.

The knight in shining armour arrived with the creation of the Treasury's new lending unit. The unit saved BoI from having to more than double its take by providing the final £120 million that the deal needed to get away.

Financing

Manchester Waste's financing was unique in that the total of non-commercial debt was ultimately greater than that provided by commercial lenders.

The commercial lenders were:

• Bank of Ireland - £95 million
• BBVA - £55 million
• Lloyds TSB - £55 million
• SMBC - £40 million

The non commercial debt breakdown was:

• EIB - €200 million (£182m)
• Infrastructure Finance Unit - £120 million
• GMWDA - £35 million

The total debt facility came to £582 million. Viridor Laing provided £90 million in equity, giving the transaction an 87:13 debt to equity ratio.

A capital contribution from the GMWDA of £70 million brought the project value to £742 million.

The commercial tranche was priced at Libor +325bps, increasing to 425bps with a tenor of 23.5 years and a cash sweep after year 10. The Treasury's pricing matched the commercial debt.

Financial close was achieved on 9 April.

Pinsent Masons was legal adviser to the sponsor and PwC provided financial advice. Eversheds acted as legal adviser for the procuring authority, Ernst & Young was financial adviser and Entec provided technical advice. Addleshaw Goddard was legal adviser to the lenders.

Conclusion

Financial close on Manchester Waste would be a significant achievement in any market, let alone one as challenging as this. The fact that it did eventually get away is testament to the lenders' drive together with valiant support from the sponsor, procurers and government.

More than one source involved in the deal has told IJ News that they have never seen so many people involved or such a complicated structure. And as many people as were involved in the deal walked away from it - citing discomfort over the structure.

New ground was broken by Manchester Waste in a number of ways, primarily by the introduction to the market of the Treasury lending unit. The Treasury's loan coupled with a contribution from the procuring authority could mark a sea-change in the level of public sector involvement in major infrastructure projects.

The bespoke nature of the deal, not to mention the enormity of the project, means that it is unlikely to be replicated elsewhere. However, there is every chance that the example set by Manchester could well show other UK waste PFIs currently in the pipeline (of which there is no shortage) that it is possible to close deals - even in this market.

The project at a glance