The HWC product has been developed to offer an integrated debt package to a borrower through a single debt instrument provided at a spread over the appropriate Government Treasury/Gilt. HWC will then tranche the debt into two sources, a senior piece (the “A Notes”) and a subordinated piece (the “B Notes”). The A Notes will be issued as senior bonds to the capital markets and the B Notes will be placed with a fund managed by Aviva. The fund, through the B notes, will provide a “first loss” tranche of debt for a project. If we take the example of a PPP transaction where senior debt may be 85 percent of the total funding requirement, the concept is that the fund will provide say 10% of the funding requirement. Under any loss scenario this tranche would be impacted first. The A Notes, representing the remaining 75 percent, are therefore credit enhanced. The aim would be to take the total project debt with a rating of BBB-/BBB and use the fund to enhance the risk profile of the A Notes to at least BBB+ and therefore attractive to the capital markets.
The structure uses the principle of some real estate funds where the B Notes are the controlling creditor of the project unless the project performance falls below pre-defined thresholds, in which case the A Notes take control. This alleviates the need for bondholders to manage the project on a day to day basis unless the project is in distress. Once executed, the role of Hadrian’s Wall Capital would be to provide a monitoring service for the investors to ensure they receive timely information.
It could be considered that the B Notes are, in effect, mezzanine debt, the important difference being that the total debt (A Notes and B Notes combined) is rated investment grade and whilst the loss given default of the B Notes is higher, the probability of default is equivalent to the usual senior debt position.
Fundraising is in process and the fund has currently secured Aviva as its core investor and fund manager. In March 2011 the EIB has made a £50 million investment in the fund to support its role in unlocking other sources of capital for key infrastructure projects across Europe. The fund is willing to provide debt in Sterling and Euros.
