The UK government's Infrastructure Guarantee Programme found its first major breakthrough for vital infrastructure on the £600 million ($998 million) Mersey Gateway Bridge PPP, which is a project of many firsts for the UK.

The demand and greenfield risks prompted the UK Treasury to provide unprecedented and robust support for both lenders and one of the country’s smallest local councils. The deal structure, combining bank loans and a public bond, takes advantage of healthy liquidity in the UK market. It is also further evidence of the attractiveness of the sector that Mersey Gateway marks Korean construction firm Samsung’s debut in European infrastructure.

First Infrastructure UK wrap

George Osborne, the UK Chancellor of the Exchequer, launched the country's £40 billion UK Infrastructure Guarantee Programme in 2011 to counteract depleted bank liquidity amid the Eurozone crisis. But banks soon returned, along with the arrival of institutional investors, and the programme's necessity faded, meaning few opportunities to carry a project to close. Mersey Gateway was one of the first confirmed, having lined up a Treasury guarantee on its project debt in June 2013 ahead of a list of 40 prequalified projects several months later.

Before Mersey Gateway’s £257 million in fully Treasury-wrapped bonds, the programme had not really accomplished its goal of encouraging long-term institutional lending on nationally significant projects. The Mersey close marks just the second Treasury guarantee, after the £75 million five-year loan for Drax Power Station which Friends Life provided in 2013.

Investors flocked to purchase the Aa1 (Moody’s) rated 29-year project bonds, with pricing coming in tight at 42bps over 25-year gilts, with a coupon of 3.842%. The Treasury charged a 105bp premium for the wrap. UK-based pension funds and insurers dominated the oversubscribed book, with Legal & General, Prudential, and Aviva among over 20 investors. 

Looking at some comparisons, only a small number of wrapped project bonds have launched recently in Europe, mostly for social projects in the UK. North Tyneside Elderly Care Homes PFI priced at 185bp over the equivalent forward curve gilt in March 2014 with an Assured Guaranty wrap, whilst in December Brunswick Housing PFI had a margin of 190bp over 2025 Gilts. 

Samsung’s debut

Samsung joined the Merseylink consortium having been seeking an entry to the developed European market for quite some time. This is the Asian infrastructure player’s first project in the region. To Mersey Gateway, Samsung brings low costs and bridge financing from Korea Finance Corporation.

Merseylink’s equity providers are Macquarie Capital (37.5%), Bilfinger Project Investments (37.5%) and a joint venture of FCC Construcción and 3i (25%). Construction contractors FCC, Kier and Samsung expect to finish construction in the third quarter of 2017.

Mersey Gateway will involve building a new 2.13km tolled bridge over the River Mersey in the north-west of England, between the towns of Runcorn and Widnes, as well as 8km of approach roads. The span should provide relief to the heavily congested Silver Jubilee Bridge, the only crossing for about 32km, and under the project both bridges will be tolled.

Small council, big burden

Halton Borough Council awarded a 30-year design-build-finance-operate-maintain concession to Merseylink in May 2013. Although one of the country’s smallest authorities, it will make overall £1.5 billion of availability payments throughout operations, mainly funded by toll revenues. Therefore central government offered further innovative support toward the council’s risk burden.

The Department for Transport (DfT) provided an availability support grant to the council. It offered a gradually decreasing 12-year commitment, along with a commitment to cover in full the council’s availability payments from 2017 in the event of shortfalls in toll revenue. In addition the Treasury has provided a form of counterparty support backing the DfT’s commitment. This is the first formal support of its kind for a council in the UK.

Revenues from tolls over the concession are forecast at about £2 billion. Sanef will be responsible for toll collection.

The council and adviser KPMG assembled a structure to separate demand risk from the senior finance, to deliver strong terms. A separate toll SPV with private participation bears collection risk. However if underlying demand is down that is entirely a public sector risk. The toll SPV does share in a degree of upside if user demand is above the financing's base case.

The final package

After much anticipation HSBC arranged the £257.16 million in wrapped senior bonds for issuer Merseylink and was a bookrunner alongside Crédit Agricole, Lloyds and SMBC. The bonds listed on the Irish Stock Exchange.

Crédit Agricole, Lloyds, KfW and SMBC also provided a separate £141 million 18-year amortising facility. It priced at a margin of 210bp over Libor during construction, falling to 200bp for three years post-construction and rising incrementally to 280bp after 13 years.

Korea Finance Corporation provided a £102 million bridge facility for the two-year construction period. After construction the council will make a capital contribution of £102.5 million, funded by prudential borrowing which will be repaid from toll revenues.

Macquarie provided £49 million of mezzanine debt with a 29-year tenor, whilst the equity sponsors provided £52 million of equity.

Advisers

The sponsor’s advisers were Macquarie (financial) and Ashurst (legal).

The council’s advisers were KPMG (financial), DLA Piper (legal) and Gifford (technical). Additional technical advice came from Halcrow, EC Harris is cost consultant and Mott Macdonald is traffic adviser.

Freshfields Bruckhaus Deringer was legal adviser to the banks.