The southwest Calgary ring road is the sixth and latest ring road to achieve financial close in the province of Alberta. It is amongst a series of ring roads the government has procured as design, build, finance and operate (DBFO) concessions including Northeast Anthony Henday Drive and Northwest Anthony Henday Drive in Edmonton and the Northeast and Southeast Stoney Trail projects in Calgary.

This C$1.42 billion ($1.08 billion) southwest portion of the Calgary ring road is also the second largest project to close in Alberta this year, after the Fengate- and EllisDon-led C$1.8 billion Edmonton Valley Line LRT project that closed in February. Sponsor Plenary closed, in September 2016, the smaller C$174 million Stoney CNG bus storage PPP in Calgary.

These three infrastructure transactions are the only ones to close in Alberta this year and perhaps in the years to come, as the province’s PPP pipeline continues to thin due to waning political support. Alberta’s present government, elected in 2015 and led by the New Democratic Party, has been vocal about its criticism of PPPs and the use of the model by its conservative party predecessors. The democrats are in power in Alberta after six consecutive conservative party terms.

The southwest Calgary ring road project was meant to be followed by a DBFO concession for the final remaining section of the ring road – the 8km west Calgary ring road. However the future of that road, especially on whether it will move ahead as a PPP, is uncertain now.

Construction timeline

The 31km southwest section is the longest portion of the Calgary ring road. The construction involves: 31km of six and eight lane divided highway, one roadway flyover, one railway crossing (flyover), 49 bridges, including bridges over rivers and 14 interchanges.

This section of the road will run from Highway 8 (near the Elbow Springs Golf Club), to Macleod Trail SE including reconstruction of Glenmore Trail from Sarcee Trail to east of 37 Street. In particular, the southwest portion of the ring road will involve river crossing structures at the Elbow River, a creek crossing structure at Fish Creek, a culvert at Cullen Creek, three watercourse realignments and additional pre-grading for future interchanges.

The province had to recognise and take into account the environmental sensitivities surrounding construction of the road that crosses over the Elbow River which is the main source of water for Calgary residents. In addition, the province signed land acquisition agreements with the Tsuut’ina First Nation (TTN) on 27 November 2013, to purchase the land needed for the project, which was transferred to the province on 22 May 2015. Included in the land purchase is a commitment to construct the ring road portion within seven years from the transfer date, failing which the land will revert back to the reserve, subject to certain conditions like force majeure events etc.

Some 15kms of the road, located on lands acquired from TTN, will need to be delivered within 49 months while the remaining 16km not part of the acquired land has a 61 month construction period. In total the entire project has a planned five-year construction phase.

The project is lead sponsor Meridiam’s second and co-lead sponsor Kiewit's first ring road project in Alberta, respectively. Meridiam previously invested equity alongside Hochtief and ACS in Alberta's Northeast Anthony Henday Drive PPP in Edmonton that closed in 2012. Other consortium members on the southwest Calgary ring road include Connor, Clark & Lunn Infrastructure, Ledcor Developments, KGL Constructors and Graham Infrastructure. The consortium will begin construction on the project in the fourth quarter 2016 and the road is expected to open to traffic by October 2021. The operations and maintenance of the highway will be subcontracted to Alberta Highways Services.

The province of Alberta together with the federal government of Canada, is backing the project with about 60%, or C$747.2 million, of capital payments that will be made during the construction phase and at substantial completion. This will also retire part of the private sector debt. The province is rated at AA (high) with a stable trend by ratings agency DBRS, which notes that the province has a demonstrated history of honouring its contractual obligations.

Bonds

The project’s financing package featured a bank-bond hybrid, a staple for most Canadian deals over the past few years. The C$380.84 million long-dated bonds piece, underwritten by TD Securities and Scotia was assigned an A (low) rating with a stable trend by DBRS. The ratings agency projects a minimum debt-service-coverage-ratio (DSCR) of 1.20x over the life of the project.

Sources told IJGlobal that approximately 10 investors, primarily Canadian life insurance companies, bought the bonds. Although it is a public bond issue, the notes were marketed in a more private placement manner which suited the size and market appetite for the issuance. Underwriters didn’t need to canvass the entire market for the bond sale which helped speed up the process to financial close.

One of the unusual aspects of the financing is the participation of German lender KfW IPEX-Bank that was sole lender on the C$96.04 million, 15-year tenor credit facility. Medium to long-dated bank debt is rare for most commercial banks today, especially in Canada. KfW IPEX-Bank is both the loan and hedge provider for the medium-term credit facility.

DBRS notes in a 15 September report that although KfW IPEX’s parent company, KfW Banking Group, benefits from the direct statutory guarantee from the Federal Republic of Germany (rated AAA with a stable trend), KfW will be sourcing the loan using its own balance sheet, therefore introducing modest financing risk to the Project. Another shorter, 5-year tenor C$208.3 million credit facility is being provided by Desjardins, BTMU, Scotia Bank and ATB.

Advisers

For the consortium, Scotia was financial adviser, while Osler, Hoskin & Harcourt was legal adviser. INTECH was insurance adviser for the consortium and the lenders. Altus was lenders’ technical adviser while Mazars conducted the model audit. Englobe acted as technical adviser for the sponsors. Tory’s was lenders’ legal adviser. Deloitte was financial adviser to Alberta Transportation on the project.