‘Bank-to-pension’ funding puzzle – solved?

The Netherlands has successfully closed a road project using a much-coveted, first-of-its-kind, ‘bank-to-pension’ funding solution.

The N33 design, build, finance and maintain (DBFM) contract will require €125 million of financing to pay for the widening of a 38-kilometre portion of the road. The novelty is that Dutch pension provider APG will finance 70 percent of the debt used for the project, or €77.8 million – the first time a Dutch pension is providing a loan for a Dutch infrastructure project.

The loan will be inflation-linked and will kick in once construction on the project finishes, refinancing a substantial portion of the commercial debt supplied by Bank of Tokyo-Mitsubishi, KfW-Ipex and Rabobank. 

An APG spokesman explained the loan will “pay a fixed coupon at face value lower than the interest charged by banks,” although he admitted that, once you add the inflation-protection element, then the loan cost becomes similar to bank debt.

However, there is still an important difference, the spokesman pointed out: “Bank loans offer a floating rate, requiring an interest swap to fix interest on the loan. That would cost the borrower around 25 basis points to 30 basis points a year – which the APG loan saves.”

Cost aside, the project’s most important achievement is that it successfully piloted a ‘bank-to-pension’ funding solution that might be used for future public-private partnership (PPP) projects. It was so successful, in fact, that “the consortium used the maximum amount of inflation-linked debt allowed” for the project, the APG spokesman highlighted.

This opens the door for similar financings in the future and APG is certainly interested in them. “We have a strategic allocation of 2 percent to 3 percent to alternative inflation, looking at inflation-linked debt. If you consider that we manage some €320 billion of assets, we still have quite some money to spend,” the spokesman added. 

But the €6.4 billion to €9.6 billion allocation will not be used solely for infrastructure loans – it will also target corporate loans to firms “whose income streams naturally provide an inflation link,” the spokesman explained.

Dutch is best

Asked whether APG would be interested in investing in inflation-linked infrastructure debt outside of the Netherlands, the spokesman answered that “the best inflation for us would be Dutch inflation. But Europe is a possibility. In the coming years, Europe will need €1 trillion for infrastructure and pensions could have an important role to play” in funding that amount.

In addition to being a pioneer in the funding arena, the N33 is also the first new project originated by the €390 million joint venture established by Dutch pension provider PGGM and Dutch developer BAM last year. Previously, the joint venture had spent €45 million acquiring a batch of operational PPPs from BAM. 

The partners plan to spend another €55 million buying operational projects and some €240 million bidding for new projects like the N33.

PGGM, one of the Netherlands’ largest pension providers, managed some €128 billion as at October 2012. 

KPMG acted as financial advisor to the PGGM/BAM consortium during the N33 tender process and assisted with financial close preparations. De Brauw Blackstone Westbroek and BDO respectively provided legal advice and model auditing to the team. Nauta Dulith (legal), Mott MacDonald (technical) and AON Global Risk Consulting (insurance) advised the banks.