On 23 June 2009, the second phase of the Lewisham BSF programme reached financial close with debt financing from Aviva, formally Norwich Union.

The London Borough of Lewisham has committed to spending more than £200 million on rebuilding or refurbishing nine secondary schools and three senior Special Educational Needs (SEN) schools together with the construction of a new all-age school at Loampit Vale.

The Lewisham BSF programme has been noted as being one of the more ambitious programmes in the country.  The Local Education Partnership includes participation by Learning 21, a Costain/VT Education and Skills joint venture.

In this article, Kate Orviss (partner) and Victoria Baker (solicitor) from the law firm Pinsent Masons look back at what first encouraged the sponsors to approach Aviva to fund the project and examine the transactions key differences to conventional debt funding.

Financing

Phase I of the Lewisham BSF programme closed on 13 December 2007 with Barclays Bank acting as sole MLA, providing £60.4 million in senior debt and an equity bridge loan of £6 million. The Phase I funding was provided to finance the design and build of Sedgehill and Catford schools.

On Phase II, Aviva acted as sole MLA providing about £24.3 million in debt to finance the design and build of Northbrook school. The total debt included a £22 million term loan provided for a period of 26.7 years and a £2.3 million equity bridge loan.

The key differences of the Phase II financing to conventional debt funding included:

• Aviva's use of internal funds to fund these schemes as opposed to more traditional sources of project finance such as traditional bank lending from interbank markets - this makes financial close less exciting!
• All monies are paid up front and can be held in the account of the project vehicle. Therefore the risk of having a defaulting lender is removed. However, this does mean the project company takes on the risk of the account bank failing.
• Break costs - Aviva use their own early repayment fee calculation which, while similar to a Spens clause, can be less punitive on the borrower than traditional break costs.
• No cash sweep therefore surplus cash in the project company does not automatically get applied in pre-payment of the loans. Instead, it can be paid by way of dividend.

Why Aviva?

At the end of 2008 Costain were looking into the different financing options available to them for Phase II of Lewisham BSF, Northbrook School. In December, the company approached Aviva.

Aviva have long been strong in the health sector and were keen to expand into financing different sectors, one of which being education. Whilst Costain continued to consider traditional financing options with the key banks, they were also interested in the package being proposed by Aviva. This all came at a time when credit conditions were such that bank terms were rapidly deteriorating and the cost of financing was increasing.

The overall impression gained of Aviva from the outset was the flexibility of their approach. They were keen to work with the consortium to achieve an affordable and competitive funding package. Aviva's push to move into the education sector also meant that there was no cap on the funds they were willing to make available to Phase II.

In the market as it was at the start of 2009, the risk and timing implications of banks pulling out of club deals had already been seen on other projects such as Greater Manchester Waste. It was important to the project that funding be provided as quickly as possible to allow construction to commence promptly. Therefore the ability to remove this funding risk was a key consideration to the success of the project as a whole.

In addition, Aviva procedures allow them to obtain credit approval to the project weeks before financial close whereas banks are traditionally only able to seek credit approval days before financial close, thereby reducing the uncertainty of obtaining credit approval to the negotiated terms.

The general package being offered by Aviva was more competitive than other solutions being offered at that time. Arrangement fees were lower, there was no requirement for a cash sweep or commitment fees, Aviva were able to offer all of the facilities required by the sponsors whilst offering the full 25 year term sought. The affordability of the Aviva solution was hugely important to the project at a time when the affordability of the project was a concern. Further, the terms offered by Aviva held constant throughout the tender process.

It was the combination of the package being offered which also impressed the London Borough of Lewisham. Whilst the overall package offered by Aviva met the requirements of the sponsors and the local authority, there was some apprehension at using a financial institution new to the sector. However, on balance, it was felt that the advantages outweighed any possible risks.

Conclusion

Lewisham BSF programme is part of the government's key initiative to improving educational facilities in England and Wales.

Despite the constrained financing conditions at the inception of Phase II of Lewisham BSF, Aviva were able to offer a cost effective and affordable solution to the financing of this Phase of the project.

Whilst it is still early days for Phase II of Lewisham BSF, the sponsors have found Aviva's approach to be cooperative and practical with a mutual respect for the operation of the project and look forward to working together in relation to the next round of PFI schools which are anticipated to reach Financial Close in 2010.