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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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slide1

abcdefghij

Financial Partnerships Unit

Senior Debt Funding in PPP’s

(Comparison Bank / Bond Financing)

BEN KING

Financial Partnerships Unit

contents
Contents
  • Background
  • Bank Funding
  • Bonds
  • Mechanics of Bond Finance
  • Differences - Bank / Bond funding
  • Reference Material
ppp funding
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
bank funding
Bank Funding
  • Most popular
  • Recognised process
  • Robustness and deliverability key
  • Final cost of funds reflects market rates
bond funding
Bond Funding
  • Bond
    • what is it
    • how it works
  • Why use it? – potential cost saving
  • Number of key parties
bond funded ppps in scotland
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
slide7

Fixed/ floating rate bond

Public issue

Wrapped

Index linked bond

Unwrapped

Private placement

Limited price index (“LPI”)

Types of Bonds

senior debt finance via a bond
Senior debt finance – via a bond
  • Two main types:
    • Index-linked
    • Fixed
  • Different interest charges apply
  • Market appetite / liquidity can vary
bond mechanics monoline insurance
Bond Mechanics - Monoline insurance
  • What is it
  • How it works
  • Implications if not available

Issuers

Investors

Lower financing costs

Financial peace of mind

bond mechanics rating agencies
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
bond mechanics issuing process
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
slide13
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

conclusions bank vs bond
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
slide16

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