The latest public finance initiative funding for UK defence ministry accommodation is Aspire Defence Finance plc, which was launched in late March, via Citigroup and HSBC. The £1.8 billion ($3.14 billion) transaction involves two series of monoline insurance-wrapped fixed-rate notes – series A wrapped by Ambac and series B by MBIA. The triple underlying credit is rated BBB/Baa3.
Volumes of monoline-backed paper in Europe have fallen steadily in recent years as investors (searching for yield) have become comfortable taking on risk without a guarantee. In 2003, 9.82% of securitized bonds issued in Europe were wrapped; by 2004 this had fallen to 5.95% and by 2005 it was just 3.62%. The monolines themselves are therefore increasingly reliant on the UK’s PFI programme as a source of business.
The Aspire project will provide living and working accommodation for 18,000 military and civilian personnel in four garrisons in Hampshire and Wiltshire. Aspire will also manage all living and working accommodation at the garrisons over the next 35 years.
Investors in long-dated fixed-rate sterling bonds will be no strangers to this type of risk: rental streams from defence ministry accommodation backed one of the first PFI securitizations, the Annington Homes transaction 10 years ago in October 1996. There have been several taps of this structure in the intervening period.
The Aspire consortium, which is a joint venture between Carillion and Kellogg Brown & Root (KBR), won the contract to construct and operate the accommodation in August 2004. The project is relatively low-risk as the new-build works are relatively straightforward. But the operational leverage in the first few years of the contract is relatively high and revenues relative to operating obligations are comparatively low during this period.