Tearing off the wrapper

Category: European long-term financing

Winner: University of Hertfordshire Student Accommodation PFI

Nominated by: RBC Capital Markets (financial adviser to sponsors, sole lead bond arranger)

Other participants included: Meridiam Infrastructure (project sponsor); Bouygues Development (project sponsor); Bouygues UK (developer); University of Hertfordshire (project sponsor); Legal & General Investment Management (project sponsor); Derwent Living (project sponsor/operations and facilities management)

Date of transaction: 21st May 2013

Size of transaction: £190m (€230m; $316m)

There were several takeaways from the closing of the University of Hertfordshire Private Finance Initiative (PFI) accommodation scheme, but the most important was that for the first time in Europe, institutional investors got comfortable enough with a greenfield infrastructure project to fund it without recourse to third-party credit enhancement.

For those with fond memories of the bygone £100 billion (€118 billion; $154 billion) European project bond market that thrived when the monolines were in business, the closing of the university project with a 41-year unwrapped project bond was extremely good news.

The project was funded through a combination of £145 million worth of unwrapped index-linked bonds plus sponsor equity. It achieved off-balance sheet treatment for the University as the project company bore full demand risk on both the occupancy level and rental price of the accommodation.

In spite of this transfer of risk, the project bonds were assigned an A- rating by Standard and Poor’s (S&P), reflecting what RBC Capital Markets – in making its submission – described as “the robustness of the funding structure and the various covenants that were developed to make the project deliverable”.

S&P itself noted the lower than average gearing (75 percent rather than the 80 to 90 percent typical of PFI), a strong debt service coverage ratio, limited construction and facilities management risks and strong demand for on-campus accommodation.

In making its case, RBC said: “The unwrapped project bond financing structure that was developed was the first of its kind to be implemented in Europe in over 15 years and gave the consortium access to particularly long-term financing provided by institutional investors as an alternative to traditional shorter-term banking solutions.”

For the students of the University of Hertfordshire – and indeed for the University’s future – the deal sounds like good news. It will see the transfer and refurbishment of 500 rooms, the building of 2,500 new rooms and the maintenance of all 3,000 rooms over a concession period of 50 years. This is all highly significant since the University had been at full occupancy for the five years prior to the deal being struck.

Speaking last year, Thierry Deau, chief executive of project sponsor Meridiam Infrastructure, pointed out that the deal also provided a neat link between the generations. “Long term savings of future pensioners are mobilised today to finance a project key to a young student population that will in return contribute to the UK’s long-term competitiveness,” he said.

For the judges, the deal was all these things – but was fundamentally a seminal contribution to the future of PPP/PFI financings in a world where bond finance is seen as the natural replacement for the reduced supply of long-term bank funding.

What the judges said:

“This [University of Hertfordshire] gets my vote. The term of the financing is exceptionally interesting.”

“All three leading contenders – Hertfordshire University, Salford Housing and Greater Gabbard – are using new financing techniques. Greater Gabbard ticks a box for being traditional project financing using non-traditional financing sources.”

Honourable mentions in this category:

Salford Pendleton Social Housing (nominated by FHW Capital)
Greater Gabbard OFTO (nominated by AMP Capital, Balfour Beatty and Equitix)