Tearing off the wrapper

A recent PFI unwrapped bond deal shows European investors are cozying up to greenfields.

There are several takeaways from the recent closing of the University of Hertfordshire Private Finance Initiative (PFI) accommodation scheme, but the most important is this: 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, Meridiam’s closing of the university project with a 41-year unwrapped project bond is good news. For those marketing credit-enhancing bond solutions – like the European Investment Bank’s project bond or Hadrian’s Wall – maybe not so much. 

The University of Hertfordshire closing is certainly a sign of the times and of institutional investors’ seemingly insatiable appetite for infrastructure debt – but it’s also a project with some singular characteristics. 

For starters, as Standard & Poor’s (S&P) pointed out when it rated the bond A-, the 3,000-bedroom project carries limited construction risk and benefits from a “standard construction security package” that effectively passes on all construction risks to the contractor, “subject to standard caps on liquidated and ascertained damages set at 70 percent of the total contract value”. 

There’s also an on-demand and unconditional performance bond from Societe Generale which S&P deems sufficient “to cover the replacement of the major contractors and at least a minor subcontractor if required”. 

Considering the main contractor on the project is Bouygues UK, which has considerable experience with this type of project, that risk seems negligible. The facilities management (FM) contract is also covered by a similar security package and is in the hands of a similarly experienced FM provider. 

In addition, the University of Herefordshire’s supply-demand metrics are pretty favourable. According to S&P, even after the new bedrooms are completed, “the total number of rooms [the university] will provide to the number of full-time students will be less than 1:2”. Plus, the university has reached full occupancy over the last five years, so there is a clear demand for the current PFI project. 

In short, you have a contractually solid greenfield project with good visibility and low construction risk – quite a different proposition from, say, a new-build underwater road tunnel fully exposed to traffic risk. 

That takes nothing away from Meridiam’s success in getting institutional investors to back some £145 million of unwrapped long-term debt. In fact, its trailblazing role will surely be appreciated by other sponsors doing business in Europe because it shows that they can now – with the right kind of project and structure – sit in a room and convince institutional investors that, actually, greenfield risk is not unmanageable. 

It also shows that investors are getting increasingly sophisticated in their understanding of greenfields and can now appreciate that a university accommodation new-build is an entirely different beast from a greenfield transportation project. 

What Meridiam’s success crucially demonstrates, though, is that sponsors can now approach institutional investors and structure a project bond without any type of third-party credit enhancement. Given where the market was just a couple of years ago, that’s a remarkable – and very encouraging – change.