Infrastructure Funding

Andrew Screen
Director – Head of GVA Financial Consulting
January 2011
Andrew Screen – Director
Head of GVA Financial Consulting

• Background
– Merchant Banking
– International Finance
– Property Development
– Financial Consultancy

• Specialist Areas
– Joint Ventures
– Structured Finance, Structured Vehicles
– Equity, Debt and Mezzanine fund raising
– City regeneration, PPP
– Negotiation

• Changing the view of structured finance

Agenda

PART 1 PART 2

• Monolines • Infrastructure Funding

• Securitisation • Tax Increment Finance
• Sources of Equity • Funding TIF
• Sources of Debt • Charge over Land
• Public Sector Funding Mechanism
• Risk
 Monoline insurance of PPP/PFI bonds

Traditional model
BBB rated AAA rated
Fee
Guarantee Pension,
PPP project Monoline
insurance
(bond issuer) Project monitor insurer
fund
role

5% bond on basis of AAA rating

through guarantee

Then…monolines diversified out of infrastructure into asset backed securities

derived from consumer loans, i.e. credit cards, cars, mortgages…and it all went
wrong
BBB rated BBB or less rated
Pension,
PPP project Monoline
insurance
(bond issuer) insurers
fund

Monolines currently out of the market. Pension and

insurance funds need alternative method to get assurance
over projects to be able to offer competitive rates
 Monoline Insurers

Monoline Ratings pre and post the financial crisis

Monoline Standard & Poor
Jun-07 Nov-09
Assured Guaranty Corp. AAA AAA
Financial Security Assurance (UK) Ltd AAA AAA
Ambac Assurance Corp. AAA Caa2
MBIA UK Insurance Ltd. AAA B3
Syncora Guarantee (UK) Ltd. AAA CC
FGIC UK Ltd. AAA Withdrawn
 Collateralised Debt Obligation

Income at 5%
Deal 1
£80m
4% AAA
Bank
Deal 2
£80m
AA

Reducing risk, reducing return

Deal 3 Package
£80m 1

Sale to investors
Deal 4 A
£80m
Deal 5 £800m Assets Slices of
£80m transferred Special BBB debt
6% Package
Deal 6
Purpose packaged 2
£80m debt Entity BB for sale
Deal 7
£80m
Deal 8
B
Package
£80m
3 etc…
Deal 9 CCC
£80m

Deal 10
£80m 10%
CC
4.5%
+1.5% £800m payment Rated ‘slices’
margin of debt
Packaging of a securitised deal

Energy Energy Energy Energy Package

1
Road 1 Road 2 Road 3 Road 4
NHS 1 NHS 2 NHS 3 NHS 4

BSF 1 BSF 2 BSF 3 BSF 4

Package
AAA AAA AAA AAA 2

A A A A
Package
3 etc…

B B B B

BB BB BB BB
Sources of equity finance

• Equity Logic

• Private Equity

• Opportunistic Funds

• Pension Funds – accumulating funds

• Sovereign Wealth Funds

• Equity size, £5m; £15m; £25m; £50m; £100m>

• Short & Long Term

Sources of Debt

• Banks

• Pension Fund Infrastructure Funds

• Term of debt reduction 10 years – refinancing required

• Margin increases 200bps

• Arrangement fees & commitment fees

• High break costs/refinance

Public Sector Finance

• Prudential Borrowing from a Local Authority

• Tax Increment Finance (TIF)

• JESSICA

• TIFU

• Local Authority Bonds

• Local Authority Guarantees

• State Aid
Risk

• Less appetite for risk

• Less appetite for non-recourse funding

• BBB to AAA ratings

• Security of asset

• Development period – performance bond

• Volatility of income stream

• Index linked income stream (RPI 0%-5%)

• Local Authority leases or backed

Part 2

Infrastructure Funding Structures

 Infrastructure Funding Methods

• Prudential Borrowing
• Tax Increment Finance (TIF)
• Infrastructure Fund
• Joint Venture Development Agreement
• Development Vehicles
– Local Asset Backed Vehicle (LABV)
– Local Incentive Backed Vehicle (LIBV)
• Loan Guarantee Fund
• Business Growth Incentivisation Scheme
• Community Infrastructure Levy (CIL)
• Business Improvement Districts (BID’S)
• Municipal Bonds/Municipal Infrastructure Bank
• Charge over Land mechanism
• Joint European Support for Sustainable Investment in City Areas (JESSICA)
Tax Increment Finance (TIF)
Tax Increment Financing – the concept

Blighted Development Area

-
140,000 Tax uplift captured to
fund infrastructure
120,000

100,000
Uplift in tax value as
Taxable a result of enabling
Value/ £'000 development
80,000

Base tax level

60,000

Predicted decline from

40,000 base if no enabling work
is undertaken

20,000 Tax Trend - Blight

Frozen Base Tax

Incremental Tax

0
-8 -6 -4 -2 0 2 4 6 8 10 12 14 16 18 20
Time
TIF cost and income profile

TIF income

Years
Yr 0 Development Yr 5 Operational Yr 25

Infrastructure
cost
Tax increment financing – the issues

• Restricted to growth in business rates

• Not suitable for purely residential schemes

• Extension of prudential borrowing powers (unlike in the USA where the

public sector issues bonds but does not always take risk)

• Risk transfer or bond splitting (not always prudential borrowing)

• No indication that any bonds issued will be tax free

• Business rates are set by Treasury not Local Authorities

Tax increment financing – the issues

• Clear business case of infrastructure or blight requirement

• Delay in development can leave the Council financially exposed

• Evidence of additionality and avoidance of displacement

• State Aid and OJEU issues on existing schemes

• Anticipated implementation 2013

Potential sources of finance for TIF

• Local authority prudential borrowing (precedent)

• Local authority/developer issued bond
• Pension funds
• Private equity arrangement/placement
• Bank debt finance

Issues
• Cost of finance
• Risk and class of security AAA/BBB
• Volatility and covenant of cash flow
Charge Over Land Mechanism
Charge Over Land Mechanism

• Funding of roads

• Schools

• Hospitals

• Fire Services

• Community areas
 A Property Development Approach

• Land required infrastructure

• Planning will uplift land value

• Land value will increase over time

• Security will be taken over land

Land 3

Land 2 Land 6

Land 1 Land 5

ad Land 4
R o
 Joint Venture Security

Development
Council
consortium

Ownership (likely to Ownership

be minority stake)

5. As land sales are 2. Loan or equity 6. Surplus from

investment into JV. 1. Land invested
made and loan sales once loan
Loan would carry a into JV or charge
repaid charge over covenants have
charge over the over land given
land is released been met released
land Development to JV
to land owners
joint venture

4. Land sales either trigger payment

3. Payments to contractor for directly on sale, or charge carries until
the delivery of infrastructure development completed and is triggered
on sale of units
(charge increases with inflation/HPI)

Construction 3rd party

firm developer
 Cash flow Volatility

Cash flow profile

Cashflow of repayments by
Payments out for developer(s) (Z)
infrastructure provision (X)
Actual cashflow from payments
to release charge (Y)

Year 0 Year 5 Year 10 Year 25

Cashflow

Development Early sales Mature sales

period period period

X plus interest cost = W = total infrastructure cost to be funded

W=Y=Z
Conclusion

• Change in the markets not PFI/PPP risk caused downfall of

funding

• Smaller projects will continue to be funded by banks

• Innovative methods will need to be found to fund larger projects

• Tax Increment Finance will need to move forward

• Structured Finance View