XLCA-U.K. swam deeper into U.K. PFI waters last week, wrapping its first hospital deal - the GBP313 million ($574 million) Newcastle Hospital PFI. Sources at the company said that XLCA-U.K. will maintain its focus on the U.K. PFI market while also fielding new opportunities throughout continental Europe.
XLCA-U.K.'s guaranty provides triple-A coverage on a GBP198 million bond issue and a GBP115 million European Investment Bank loan. Proceeds from the bond issue will be used to replace old infrastructure scheduled for completion in May 2013. The project has a debt leverage of 92% with a minimum 1.21 times debt service coverage ratio.
A source at the company said that it was delayed in entering the prolific U.K. PFI Hospital scheme because of the length of time required to get this complicated structure off the ground. Mark Wells, director and head of U.K. PFI, XLCA-U.K. said that they began working on the Newcastle Hospital deal at around the same time XLCA closed its first U.K. PFI transaction, the GBP152.4 million M77 road financing PFI in June 2003. Hospital deals are viewed as a longer-term effort, which accounts for the lighter deal flow seen from that segment of the PFI sector.
"In terms of ongoing capital market opportunities, in addition to a continued steady flow of health transactions, as a result of the U.K. government's Building Schools for Future program, we expect the education sector to offer significant growth potential," said Wells. "An integral part of our U.K. strategy is U.K. PFI, and we hope to bring another transaction to market, our first schools deal, within the next couple of weeks." A spokesman for the company said that XLCA-U.K. was unprepared to name the deal at press time. ABN AMRO last week announced that it had been selected as preferred bidder for the GBP57 million schools PFI project in Rochdale, U.K. The project will incorporate the financing, design and construction of four new school campuses.
Competition for the monolines so far has come from the banks - deals will typically either take the bank debt route or the capital markets route. From the capital markets perspective, the U.K. government push under its new school program would deliver a number of deals. In addition, a continued steady flow of health deals that are fairly big in size are expected - sources said that a GBP1 billion hospital transaction is currently in the works and expected to come to market in the coming year.
The XLCA-U.K. guaranty adds a welcome mix for investors looking to diversify beyond the three leading European monoline insurers - Ambac, FSA and MBIA - that dominate the U.K. PFI market. FGIC also contributed to the growing diversity of monoline names in March when provided its first-ever guaranty on a U.K. PFI for the Scotland-Northern Ireland gas pipeline. "From an investor perspective there are clear benefits to being able to diversify your underlying monoline exposure," said Wells. "Since bringing the M77 to market in 2003, we have received strong market acceptance, which is something we expect will continue."
XLCA-U.K. said it was also looking beyond the U.K.'s borders and into the infrastructure boom in continental Europe for further growth opportunities. Public-private partnerships - the PFI's European counterpart - have historically been applied to projects from the Iberian peninsula, but Alberto Ramos, managing director and head of the global infrastructure group at XLCA-U.K., said that all governments are now taking steps to put together different schemes that encompass the building of roads, hospitals, schools and other public sector buildings. "In countries such as Germany, Ireland and Italy we perceive a lot of business emerging - the governments there have recently placed schemes similar to the U.K. PFI program," said Ramos.
XLCA-U.K. has backed three other road infrastructure projects in Spain, which include Autovia del Camino (the first wrapped road infrastructure project in Spain), which closed in June last year and concessionaire Autovia los Vinedos, S.A. that closed in November 2004. Ramos said that the company was considering projects involving hospitals and other public buildings in Italy, Spain and Portugal, as well as road deals in Ireland, Austria, Finland and France.
Where the company moves from there is firmly tied to how comfortable it can get with local infrastructure project laws. Ramos explained that most of these projects are typically dealt to the same handful of international developers, which then team up with someone local - the usual hurdle present is the local legal regime. Once a monoline get reasonably comfortable with the legal functions of the project the next hurdle to cross is convincing would-be developers of the benefits of choosing the capital markets route, said Ramos.
"Using a monoline may provide very attractive terms, even these days when the banking sector is quite aggressive in terms of pricing and tenor," he explained. "In a number of instances there is still a lack of familiarity to the monoline product - accessing the capital markets or getting a rating agency involved is still perceived as being complex."
Following Depfa's CLO of U.K. PFIs (see ASR 10/4/04) talk emerged of more PFI loans being written off balance sheets via this route. The GBP392 million publicly rated synthetic, partially funded CLO provides some needed liquidity for the bank's future PFI endeavors. XLCA-U.K. said that, though its efforts are largely concentrated on infrastructure projects, it did have the expertise to start dealing with Depfa styled transactions. "We were aware of the DEPFA CLO of PFI transaction and have seen a few similar deal in the marketplace," said Fred Hnat, senior managing director and COO of XLCA-U.K. "This is the kind of transaction in which XLCA, with strong expertise in both infrastructure finance and CLOs, could add value."
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