The parties offering facilities in the PPP funding market for Bond solutions is increasing. New underwriters, investors and monolines are evident. This should enable consortia to compete the various roles required to deliver a bond solution. Typically two different bond funding routes will be available (fixed and index linked). Like a Bank solution, evidence of this competition should be requested in the ITN and demonstrated within the bid submissions. Certain circumstances (for example Payment Mechanism requirements) may dictate which route is more appropriate for a PA.
In order to be able to evaluate bond funding solutions consistently between bidders, PAs must provide clear reference terms for:-
i. Reference gilt rates (fixed, index-linked or assumptions for LPI), including details of the gilt on which it has been calculated upon, interest cost basis and process for "live rate" pricing
ii. the level of buffer to price in the bond solution (typically 25 to 50 basis points in accord with Departmental requirements / best practice)
iii. GIC rate
iv. Bond margin / spread to assume (for each bond type)
v. the percentage (or acceptable range) of the Unitary Charge that can or is to be linked to the selected inflation index
vi. credit interest rate
vii. underlying credit rating to be assumed (or a means of taking account of differences in underlying credit ratings bid in evaluation processes)
viii. RPI swap pricing assumptions (if applicable) and other RPI assumptions
The above list reflects the elements in a bond solution that are likely to either vary up until financial close or can result in non like for like evaluation between consortia, hence the need to require standard terms.
PAs must request clear reference terms for:-
ix. other elements that must be priced / tendered (underwriting / placing and monoline fees, reserving and ratio requirements)
x. general terms and conditions (including timetable, due diligence, rating agencies review, inter-creditor issues)
xi. evidence that the project as structured will obtain the specified credit rating
A private placement or conduit structure should require equivalent information and approach as detailed above, but requirements should be discussed directly with prospective funders.
These areas should be evaluated in priced solutions and benchmarked against the current market terms and conditions. In particular, pricing and risk issues as detailed in Rating Agencies reports of recent public issues should be referred to.