1.24 As this was the first PFI funding competition of its kind, Exchequer Partnership and the Treasury wanted to ensure that as wide a range as possible of financial institutions were invited to take part. By including a large number of financial institutions in the funding competition the Treasury also aimed to get wide acceptance of the standard contract terms. Exchequer Partnership and the Treasury identified all the institutions with PFI experience which were also large enough to underwrite project financing of around £125 million. This exercise resulted in 28 banks, bond underwriters and monoline insurers8 being invited to pre-qualify (Appendix 2).
1.25 Of the 28 institutions invited to pre-qualify, 9 declined to do so, mainly because they did not feel that they would be able to offer a competitive bid and did not want to commit resources to the competition. From the term sheets supplied by the remaining 19 bidders, Exchequer Partnership selected a long list of the six best bids to provide the project funding while ensuring that the long list included all the different forms of financing appropriate for the project. The long list also included two bond arrangers, making a total of eight institutions who were invited to the next stage of the competition (Figure 4). The long-listed bidders were provided with more detailed project information and requested to submit bids which had received internal credit committee approval.
4 |
| Selected long list of potential funders |
Banks | HypoVereinsbank |
| Dexia |
| Halifax |
| Abbey National |
Monoline Insurers | Ambac |
| Financial Security Assurance |
Bond arrangers | Warburg Dillon Read |
| Deutsche Bank |
Source: Treasury Taskforce |
1.26 All six of the long-listed project funding bidders submitted bids, as did the two bond arrangers. Therefore during the funding procurement process, competitive tension was maintained between the different forms of potential financing (bank versus bond solutions) and between providers of the same type of financing. After evaluating the bids it was clear that there was strong competition between the two monoline insurers and that they were likely to provide the best financing option. After consultation, Société Générale therefore decided to omit the planned short list stage of the competition and requested best and final offers from the monoline insurers.
1.27 To further enhance the competitiveness of the best and final offers, without any detrimental impact on the project timetable, Société Générale and Exchequer Partnership introduced a further round of bidding between the monoline insurers. Box 1 explains the different characteristics of bank and bond financing.
BOX 1: The different characteristics of bank and bond financing | ||||
Financing characteristic |
| Bank Financing |
| Bond Financing |
Source of funds |
| Directly provided by a bank or possibly a group of banks that form a syndicate |
| Funds provided by bond investors. A potentially disparate group that can include anyone from large financial institutions to individual investors |
Arrangement of funds |
| Direct negotiations between the project company and the bank |
| Arranged via an intermediary known as the bond arranger |
Certainty of funds |
| Once the project company and bank reach an agreement there is certainty over receiving the funding |
| There is less certainty with a bond. The project company will only know if funding is forthcoming once the bond arranger has started to try and sell the bond. The certainty is increased by appointing a bond underwriter to purchase any part of the bond not sold to other investors |
Maturity |
| Currently up to around 30 years |
| Currently up to 38 years |
Re-payments |
| Flexible. |
| Fixed (unless index-linked) Repayments on fixed dates, generally at maturity of the bond. |
|
| Repayments can be matched to project cashflows |
| Repayments follow an annuity profile on fixed contract dates. |
Flexibility |
| High. As the project company is contracting with a single bank, or group of banks, the financing can be flexible. It is possible to negotiate changes to the project, possible early repayment of the loan or refinancing of the project. Also, if the project runs into difficulties the project company can negotiate with the funders to try and avoid the project collapsing |
| Very little flexibility. Due to the arms length, and potentially disparate nature of the bond holders in relation to the project company it is very difficult to make alterations to the project. It is very expensive to make early repayments or refinance a project There is also no room for negotiation with regards to the payment of interest and capital. |
Receipt of funds |
| Staged. Banks will allow the project company to drawdown the required funds as and when they are needed during the project. This means that the project company will only pay interest on the amount actually borrowed at a particular time. |
| Generally funds are received in one go at the time that the bond is sold to investors. The consequence of this is that interest will be paid on the total value of the funds from the beginning of the project. The project company needs to manage this and seek to minimise the costs by depositing the funds in an interest bearing account |
Assessment of project risk |
| The banks will undertake this risk assessment themselves during their due diligence work. The banks will therefore be in the best position to assess the risk and to price the funds accordingly |
| Bond investors are in a weaker position to assess the project themselves and rely on the bond arranger to make an assessment of the project risk for them. As the bond investors are not always in a good position to assess risk the bond issuer may insure the bond to make the project more attractive to investors |
Costs |
| Front end fees, interest on the funds borrowed and a commitment fee for the available funds not yet drawndown |
| Interest to the bond investors. An arrangement fee to the bond arranger. An insurance fee if the bond is insured |
Ongoing project scrutiny |
| Significant. The bank will monitor the project carefully to ensure that it is operating viably. If the project runs into difficulty the bank may have step-in-rights to actually run the project |
| Very little. The bond investors have little influence on the project once it is funded |
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8 Monoline insurers are institutions that specialise in insuring bonds. By insuring a bond, a process sometimes called "wrapping" in financial circles, the bondinvestors are guaranteed to receive all payments of interest and principal in a timely manner. Therefore the credit rating of the bond is increased making it cheaper to issue the bond in the first place.