The third and final installment of Canada’s Alberta Schools P3 trilogy reached financial close last month. While the deal was relatively small, especially compared to its two predecessors, it had big implications, as it brought to completion the financing of Alberta’s first K-9 public school system P3.

States and municipalities in other parts of the world, especially the US, were keeping a close eye on its success or failure. The deal, although small, did not disappoint and gave hope to public officials in the US that the K-9 schools system P3 sector can be successful.

Project History

In early 2008, David Hancock, Alberta’s Minister of Education, was tasked to find innovative ways to fund the construction of new facilities, and to upgrade existing ones, to accommodate the growing population in and around the city of Edmonton. Hancock’s plan was to implement a P3 to fund 18 new public schools for more than 12,000 students.

Many P3 experts believed that such a deal would go smoothly. With P3 projects such as the ring road around Edmonton and Alberta, and the Calgary Courthouse already under its belt, reconstructing a new school system through a P3 procurement should have been easy.

The first procurement, to construct nine K-9 schools in Edmonton and nine in Alberta, was completed in 2008 and was dubbed the Alberta Schools Alternative Procurement I (ASAP I)  for US$452.01 million. ASAP I was financed through US$27.9 million equity contribution by the winning consortium led by Babcock & Brown Public Partnerships (BBPP) and private equity firm GVEST. Bank debt, as well as an equity contribution by the Province of Alberta, also helped pay for the deal, which was hailed a success by top Alberta officials, who claimed that private sector involvement in its public grade school education system saved tax payers C$118 billion.

In 2009, however, as Alberta was planning a second P3 procurement, Alberta’s Education Ministry, amid strong protests from several labour and residential groups, including the powerful Canadian Union of Public Employees, did an about-face and decided not to include high schools in the deal. At the time, the Education Ministry said that it was worried that financial institutions would not be interested in ASAP II, given how hesitant banks were to lend after the 2008 financial crisis.

ASAP II, however, was able to attract bank financing and overcome the international financial chaos by shrinking the size of ASAP II to 10 K-9 schools in Edmonton. The original number of schools was tentatively 14, with five of them being high schools. ASAP II closed in July 2010 and raised US$220 million.

The winning consortium for ASAP II was led by Gracorp Capital Advisors (Gracorp) and Hochtief PPP Solutions North America, which each contributed US$12 million in equity towards the deal, and formed the B2L Partnership, a special purpose vehicle to handle the equity portion of the debt. While lenders were running from the US, the deal attracted Bank of Ireland and SMBC to provide US$16 million in short-term debt and provide a US$72 million, 20-year loan. The cost of the short-term debt is CDOR plus 250bps, while the US$72 million loan cost 250bps to 275bps over CDOR.

“That was actually a very tough deal to get done,” said one banker involved in ASAP II. “We had to cut down the size of it just to attract capital. With the financial crisis going on, it was hard to know whether we could even get one dollar in financing, given that this was the first P3 for a public school system in Alberta.”

ASAP III – a time for bonds

In 2011, Alberta’s then-Minster of Education, Thomas Lukaszuk, announced that cheaper capital should be sought, given that the world bond market was beginning to settle down after the financial crisis. Alberta chose the ABC Schools Group consortium, which was led by Hochtief PPP Solutions North America and the Concert Infrastructure Fund for the third phase of the project. The construction company in the consortium is Clark Construction, which signed a 30-year maintenance and repair contract.

ASAP III totaled C$540 million (US$556m), and closed on18 September following a US$89.5 million bond issue. The remaining funding is through a C$200 million equity contribution by the Province of Alberta, as well as a pledge to make future availability payments that will cover the design, construction, and maintenance of the buildings, as well as the cost of capital.

“Our biggest concern going in was that investors usually are interested in deals over C$100 million,” said one banker involved in the deal. “There was also some uncertainty over how well received the offering would be, because it was the first piece in the ASAP project that used bond financing.”

The consortium issued C$87 million in 30-year senior secured notes which notched an A- rating from Standard & Poor’s. CIBC was the sole underwriter for the issue, which was reportedly two times oversubscribed.

One banker and consortium member said that the success of ASAP I and II gave the offering a big advantage.

“Usually, institutional investors don’t really pay attention to a P3 bond issue if it is less than C$100 million. The advantage that we had was the successes of ASAP I and II. Those got a lot of attention because it was the first P3 for public schools in Alberta, so everyone knew about the project. We were able to get a pretty tight spread on the bonds and lower the cost of capital for the project compared to the price of the bank loans a few years ago.”

The bonds carried a 4.246 percent coupon and were priced at par, with a spread of 185 basis points over comparable Canadian Treasury bonds. Hochtief and Concert contributed C$7 million each, while the Province of Alberta pledged to make availability payments that are intended to cover half of the capital costs as well as the cost of construction.

The banker said that the deal was so well received in the market that the notes were priced at par. Another analyst said that the fact that Alberta pledged to make availability payments that would cover half of the cost of capital and construction, as well as the experience of Clark Construction, helped the bonds achieve an A- rating.

Advice for the US

One consortium member in the ASAP III deal offered advice to executives working on a possible P3 for the Yonkers Public School System  in New York, which is currently considering a reportedly US$1.2 billion P3 to upgrade existing schools and construct new ones. The deal would mark only the second social P3 in the US since the Long Beach Courthousein 2009

“I would tell the folks in Yonkers that it’s a lot easier to build a new structure than to take management of an existing one,” said one consortium member. “Also, it helps to have a single point person in the school system that is the decision maker.”