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abcdefghij. Financial Partnerships Unit. Senior Debt Funding in PPP’s (Comparison Bank / Bond Financing). BEN KING Financial Partnerships Unit. Contents. Background Bank Funding Bonds Mechanics of Bond Finance Differences - Bank / Bond funding Reference Material. PPP Funding.

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  1. abcdefghij Financial Partnerships Unit Senior Debt Funding in PPP’s (Comparison Bank / Bond Financing) BEN KING Financial Partnerships Unit

  2. Contents • Background • Bank Funding • Bonds • Mechanics of Bond Finance • Differences - Bank / Bond funding • Reference Material

  3. PPP Funding • comprises Debt (c 90%) & Equity (c.10%) • understand sources / uses of funds • Key issues for public sector: • Robustness / deliverability / strength • Cost of capital • Evidence of Competition • Focus of presentation is senior debt

  4. Bank Funding • Most popular • Recognised process • Robustness and deliverability key • Final cost of funds reflects market rates

  5. Bond Funding • Bond • what is it • how it works • Why use it? – potential cost saving • Number of key parties

  6. Bond Funded PPPs’ in Scotland • Education • North Lanarkshire (in progress) – circa £150m • Highland Schools (in progress) – circa £120m • South Lanarkshire (in progress) – circa £250m • Transport • M6 DBFO - £125m • M77 / GSO - £152m • Water • Stirling - £109m • Health • Law Hospital - £136m

  7. Fixed/ floating rate bond Public issue Wrapped Index linked bond Unwrapped Private placement Limited price index (“LPI”) Types of Bonds

  8. Senior debt finance – via a bond • Two main types: • Index-linked • Fixed • Different interest charges apply • Market appetite / liquidity can vary

  9. Bond Mechanics - Monoline insurance • What is it • How it works • Implications if not available Issuers Investors Lower financing costs Financial peace of mind

  10. Bond Mechanics - Rating Agencies • Who are they / What are they • What they do – there aim • Different rating scale for different risk • Monoline wrap key – higher rating = lower fee • Issues Rating Agency focuses on

  11. Bond Mechanics - Issuing process • Bond arranger leads, supported by monoline • Rating agencies review project • Bond arranger sells to investors (Roadshow) • Book-building process to get best price – allocate issue to each investor. • Bond launch • Funds released / drawn at FC

  12. Comparison – Bank vs Bond

  13. Fixing of swap rate agree underlying LIBOR rate Swap pricing Financial model finalised Funds available at close Bond issue underwritten at agreed spread + gilt rate Bond launched to market Financial model finalised Settlement period – funds available 7 days later Differences at Close: Bank/Bond Bank Bond

  14. Conclusions – Bank vs Bond • Project specifics influence route • Deals less than c. £120m, 30 year contract perhaps BANK • Market capacity issues - need proof of deliverability / liquidity • Evaluation / Consistency of Pricing is Key • Bidders should offer flexibility / alternatives • Watch for market developments and changes in appetite

  15. Comaprison of Cost – Bank vs Bond

  16. Indicative Current Pricing Comparison SWAPS BONDS British Pound Swap Rate 5.20 +MLA cost 0.03 +Credit Premium 0.15 + Margin 0.90 6.18% Gilt Rate 4.60% Spread 0.65% Monoline Credit 0.35% Premium 5.90% Interest Rate Cost Interest Rate Cost

  17. LUNCH

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