A commuter train public private partnership project in New South Wales has raised a A$1.8bn (US$1.31bn) loan that comprises an unusual combination of green and sustainability-linked features and could show the way forward for other PPP projects.
The 21-year loan for Reliance Rail PPP, which has the longest tenor for an Aussie project financing, earned both the green and sustainability-linked labels as the funds will go directly to financing green and low-carbon assets, while the cost of funding is tied to achieving four sustainability performance targets over a 10-year period, with the scope to review and extend.
“While Reliance Rail already plays an important role in providing electrified transport infrastructure in New South Wales, the GSLL presents an excellent opportunity for a mature PPP to use its debt portfolio to intensify its role in the state’s transition to a lower carbon future,” said Chad Smithies, Reliance Rail’s CEO. “We believe this initiative will pave the way for other mature infrastructure projects to pursue similar transactions.”
The long tenor, which eliminates Reliance Rail's future refinancing risks for the remaining life of the project, surpasses the 17-year maturity on the A$230m loan signed in November 2018 for the Centre for AgriBioscience PPP in Victoria.
Typically, infrastructure projects and assets have relied on US private placements to raise long-term funding, which is not readily available in the bank market in Australia.
Port of Newcastle priced a US$300m 10-year offering in December, while Westconnex motorway in Sydney raised A$1.8bn in USPP notes with maturities of 10.25, 12, 15 and 20 years last May, following a A$650m 10-year Australian note issue in March.
In 2019, Ravenhall prison PPP in Victoria completed a refinancing via A$461.6m notes due 2042, while in 2018, Sydney’s Westlink M7 toll road raised A$615m from notes with 12, 15 and 20-year portions. In 2016, Victorian Comprehensive Cancer Centre PPP in Melbourne raised A$450m through a 24-year bond issue.
However, not all credits have access to the USPP market, which, typically denominated in US dollars, exposes borrowers to hedging costs against currency risks.
Reliance Rail's latest deal underscores opportunities for PPP sponsors to tap into debt tied to environmental, social and governance metrics to achieve favourable terms. Some US$18.6bn of PF loans mature in the next 24 months in Australia, of which US$10.76bn comes due within a year, according to Refinitiv LPC data.
ESG loans, including green and sustainability-linked financings, have been popular among sponsors for financing and refinancing infrastructure projects or privatised assets Down Under. In recent years, Australian PPPs have raised a handful of ESG loans.
Last August, NSW Land Registry Services obtained a A$300m five-year SLL, while a A$2.2bn four-year green-social loan and a 12-year green loan of about A$700m – both in July – refinanced the new Royal Adelaide Hospital project in South Australia and Sydney Light Rail PPP, respectively. Port of Newcastle’s A$666m borrowing in May last year included sustainability-linked tranches with 2.5 and five-year tenors, and a 2.5-year green portion.
Five-year green loans of A$636m and A$280m refinanced the New Generation Rollingstock PPP in Queensland in May last year and the Canberra Metro Light Rail project in December 2020, respectively.
In August 2020, Murra Warra II became the first wind farm in Australia to raise a green loan for a construction project, as part of a A$440m five-year borrowing.
Green-SLL combo
Reliance Rail’s green-SLL combo will deliver reduced interest margins if the sustainability targets are met and includes an additional commitment to use any such savings exclusively to fund further sustainability initiatives, such as carbon emissions reduction for the project’s maintenance centre and trains, rather than to reduce net funding costs.
The borrowing's targets are aligned with the Asia Pacific Loan Market Association's SLL principles and includes a ratings score from Infrastructure Sustainability Council Operation, Australia’s infrastructure sustainability body, as one of the four metrics.
The other targets relate to the energy intensity of Reliance Rail's maintenance centre and trains, solar power photovoltaic generation at the maintenance centre and a reduction of operational water consumption.
The green portion of the loan has won certification from the Climate Bonds Initiative as meeting its low carbon transport electrified rail criteria and is aligned with the APLMA's green loan principles under its clean transportation criteria.
"The dual green-SLL feature on this financing is saying that not only is the underlying purpose of this company green in nature, namely low carbon transportation, but it is also not standing still and is seeking to pursue initiatives that will have a further positive sustainability impact," said Chris Ruffa, managing director of capital markets group at BNP Paribas Australia and New Zealand.
"In addition to the rare, dual nature of the loan being both green and SLL, the interesting feature of this financing was the PPP context of the borrower," Ruffa said. "Normally, the ability of an operating PPP company to directly control sustainability outcomes is limited. We were able to introduce an innovative arrangement that provided for targets to be put in place that were both relevant and ambitious that are beyond what you might normally assume to be possible from a mature PPP company. Reliance Rail sets an example of what can be achieved through PPP."
BNP Paribas, Commonwealth Bank of Australia and National Australia Bank were joint sustainability coordinators on the loan.
The other lenders are DZ Bank, Industrial and Commercial Bank of China, Kookmin Bank, Mizuho, Natixis, Nippon Life Insurance, Norinchukin Bank, Sumitomo Mitsui Trust Bank and Westpac Banking Corp.
RBC Capital Markets was financial adviser on the refinancing, while DNV acted as verifier and second-party opinion provider. King & Wood Mallesons acted as legal adviser for the borrower and White & Case represented the lenders.
The project last tapped the loan market in November 2017 for a A$1.81bn financing split into a A$903.71m five-year tranche and a A$904.6m seven-year portion.
Reliance Rail was established in 2006 to design, manufacture and maintain the largest single procurement of passenger trains in Australia. Its core assets are its 78 Warratah trains, which account for roughly a third of the suburban passenger sets of Sydney Trains, and the Auburn Maintenance Centre, a purpose-built facility in the west of Sydney Trains' passenger fleet.
AMP Capital and Amber Infrastructure-advised International Public Partnerships are equity investors in the project, which has been awarded a GRESB 5-star rating, having earned scores of 94 out of 100 in 2020 and 96 in 2021.