FT - New Tankers on the never never
 

UK defence plan hits finance snag
By Sarah O’Connor and Sylvia Pfeifer
Published: January 25 2008 22:48 | Last updated: January 25 2008 22:48


The turmoil in credit markets has dealt a big blow to the UK government’s defence procurement programme, putting in jeopardy plans to help fund a new fleet of Airbus tankers for the Royal Air Force with a bond issue.

The £13bn project over 27 years, the largest private finance initiative, is now expected to be financed by bank debt.

The government and a consortium led by EADS, the aerospace and defence group, had been planning to raise £2.5bn in the City through a combination of bank debt and a bond issue. These bonds were expected to be supported by guarantees provided by troubled bond insurer Ambac.

However, Ambac and other bonds insurers have been hit hard by losses on bonds they have insured. The credit rating of Ambac was cut below AAA by Fitch Ratings and further downgrades are thought likely, sharply reducing the value of their guarantees.

For the past 10 years, PFI deals have been using bond insurers to support their bonds when raising initial capital for the projects. The insurers, or “monolines”, give their triple-A creditworthiness to the bond, making them cheaper to sell and so cheaper for the government to raise money.

But as the credit turmoil has spread, the price of all monoline-wrapped bonds has shot up as the market worries about the ability of the insurers to stand behind their commitments.

“The investment banks didn’t think they could place any Ambac paper in today’s markets efficiently,” said somebody close to the deal.

The other monolines the government was considering working with – including triple-A rated MBIA – were similarly struck by a collapse in market confidence.

“Although other monolines have not been as hard hit, there is scepticism generally around the monoline market,” said Anthony Forshaw, managing director at Deutsche Bank, the consortium’s financial adviser.

Instead, the government and the AirTanker consortium are likely to revert to their earlier plan to finance the deal solely through bank debt. They had sought to raise some money through bonds after the banks demanded a high rate of interest during the summer credit-crunch.

Last night, Phill Blundell, the chief executive of the AirTanker consortium, said: “It is fair to say a more bank-driven solution is now likely. We still expect to achieve the affordability targets we agreed with the government.”

HBOS will lead the group of banks lending the money. Lloyds TSB are also involved, and the consortium expects to get the deal away by the end of March.

The shift could be the death-knell for the monolines’ involvement with PFI, because unless the market’s confidence in them returns, their “wraps” will be virtually worthless. “Unless the cost of capital arbitrage returns . . . it’s going to be very difficult for the monolines to recover market share,” Mr Forshaw said.

"....and the consortium expects to get the deal away by the end of March."


Yes, but which 'end of March'? 2008...9...10...20??

So the finances of the PFI might be in disarray, the contract hasn't been signed, the actual in-service date is unknown, the capability of the aircraft as a tanker will not be optimised and the FSTA version will have no capability to receive.

What good news has come of the project in recent times?

Peter Hain is currently available for fund raising, perhaps he could step-in. And perhaps a revised financing consortium, involving Northern Rock and Société Générale, with a financial team led by Jerome Kerviel?

:rolleyes:

Lets put this another way... I have been saying for a while now that UKPLC is bust. Noo Labs promise of no more boom and bust is going to bite them in the arse.
They have fought unemployment, not by generating a credible, well educated and respected workforce but by creating literally millions of non-job civil servants, allowing the unemployed to be passed off as unfit to work for reasons as rediculous as stress, whilst pouring billions into areas that needed more than funding to secure a healthy and equitable living environment. UKPLC now has the largest real public accounts deficit in its history, M4 money supply growth busting 15%, and falling tax revenues at a time we need to be spending more, in other words, we should have been saving for the past 10 years instead of spending it wantonly on millenium domes, the NHS and olympic stadia. :ugh: For me, its sad, because the last ten years were a wasted opportunity.

Back to the thread, it is really hard to see how they are going to resolve this one. Trouble is only starting for the international bond markets, with many of them expected to lose their AAA ratings. Banks will not lend to anyone, including the govt, without a significant punitative rate, and worse, they know they arent going to get in next time so they arent exactly going to go out on a limb to spend cash on something now that will only be in when the conseratives come to power.

Better get our tin hats on, as many many former bullish economists are predicting stagflation that could be worse than the 1970's. Once the public sector start to strike in force, just watch inflation go through the roof, along with pay deals! (and not neccesarily us either!)

Just finished reading the Telegraph article over a coffee in London and having a chuckle to myself!! Only 6 months ago a member of the IPT was telling me we would "have a deal before Christmas"! How I laughed.

Just remind me, wasn't the Introduction To Service date supposed to be Apr 07? Which slipped to Apr 08? And we still haven't got funding for this programme!! It must be plain for all to see (except maybe the IPTL/DEC#/CM/DCDS(EC) and CAS) that PFI, to use the Aussie, is "a crock of sh*te". If 'Yes Darling' can stump up £24 - 55 BILLION for Northern Rock, he can find £2.5B to buy the RAF a desperately needed new tanker/transport fleet!!

# Perhaps I am being a bit harsh on the DEC as I understood that he had recommended canning the PFI a couple of years ago!

Wonders to oneself: Where does this leave the other great PFI White Elephant? MFTS anyone? :\

Bankers!
 

Roland - agree wholeheartedly, but I'm afraid the seats of 38 labour MPs aren't resting on which tanker to buy. Therefore spending twice the annual defence budget to prop up a bunch of incompetent bankers will always win out over the crying need to assure a military capability. :ugh:

Rant Mode: ON
 

Well, with all of these delays, we may (who knows) get a better deal by buying full-up KC-30Bs with RR Trent (:cool:!!) off the US production line (if the USAF can overcome Boeing's political arm-twisting...). :rolleyes:

Meanwhile, back in the real world; Yes, this PFI is a total - and totally predictable - shambles and it comes back to the fact that the Equipment Programme (or whatever it's called this week) is bust. And has been bust since the SDR in 1997, when it was clear that the "bow-wave" of projects would be in 2005-2012, and would require loads more cash, but it was in everyone's* interest, to worry about that later and claim credit for it now (1997). :hmm:

*Everyone = Ministers, Senior Military (now doubtless all enjoying their pensions) and Senior Civil Servants (ditto).

Unfortunately, later is now. And (as a non-Tory, it has to be said), what continues to grip my $hit is that Ministers keep spouting on that the forces wil get whatever they need, and then (spineless?) senior military and civil service types keep parroting that "front-line commanders have everything they need blah blah". Well, as far as I can see they certainly don't!! :*

What we really need is a recognition that we need to recapitalise the forces through investment in equipment and training, in the same way that we needed to do for the NHS and education.

IMHO, we also need a national debate on what we want the military to do, and once we know that, get cross-party consensus to fund it appropriately over a 10-15 year time horizon.

Rant Mode: OFF

S41

PS, despite the fact that I think the Govt has been appalling over the Northern Rock fiasco - either nationalise it or let the damn thing go bust! - it's not correct to say we've given them £55bn. Depending on the security provided, we should get this money back with interest (eventually).

On NR, we will only get the money back if individuals are stupid enough to hand over cash in return for NR bonds; IMO, not even worth the paper they are printed on and certainly not worth the risk with the returns they are talking about. Hence one of the reasons the radio 5 live money presenter calls them "Crock". Again, another issue Labour arent too bothered about as they know they wont be in next time and therefore not their long term problem. The fact is, NR are one of the biggest lenders to the UK Equivalent of US subprime going; massive loans to those that cant afford them, and worse, interest only morgages.

What scares me is this; Labour and the treasury wouldnt have dug this deep with NR UNLESS they werent expecting the credit crisis to unfold as deeply as it has, or didnt know how bad things are full stop. Which confirms one thing for me - they arent in the driving seat at the mo, which if you think about it, when they are supposed to be in control of the economy, is pretty scary. As for the military, public spending is going to have to get cut, lets face it, defence spending has never been one of Labours strong points, I dont think things are going to change overnight... :ugh:

So Air Tanker are finding it very difficult to raise the cash for FSTA, quelle surprise. The Consortium is a collection of manufacturing companies and is relying on the troubled and sceptical finance world to back them. A thought then, too late I know, but the other, rejected, Consortium, TTSC, included Spectrum Capitol, investment and merchant bankers.

The 767 might not be such an overall perfect aircraft for the RAF as the 330 but the requirement was for a Tanker that Trucked not the other way round. Perhaps there could have been a couple on the line at Brize already and others on the way because finance had been sorted long before the present problems arose. Did the thought of a shiny new big fat aircraft dazzle the decision makers? There still seems to be a danger of ending up with nothing at all.

Well, I'm afraid Boeing haven't done terribly well supplying the 767 tanker to the Italian Air Force - it's years late and not now due to be delivered until Q2 this year....:hmm:

And that's for modified 767-200ERs, not the full-up KC767.

What a pity the RAF didn't go for those A310MRTTs Filton were offering over a decade ago....:rolleyes:

And if only we had some old and obsolescent large bombers we could bolt a HDU on the back of and call it a Bowser! Might even persuade the Beagley One to return!

Back to the FSTA - I now understand that the project is to be treated 'on balance sheet' so there's another fine mess you've got me in to .....

Well, it's such a shame that your fast jet-centric air force scrapped all the real strategic bombers, my old mate, and as a result has something of a 'capability holiday' :yuk:.

"I now understand that the project is to be treated 'on balance sheet' "

No speako staff wankword-speak, chum. What does that mean in simple pilot-speak?

"I now understand that the project is to be treated 'on balance sheet' "

as i understand it

Gordon Brown has brought in rules to state how much the govt could borrow over an economic cycle

PFI schemes are effectivley an attempt to borrow money with actually having to borrow it, thus keeping it off that balance sheet and therefore making G Brown look prudent

I.E. we pay an hourly rate for the use of the "privately owned" tankers instead of just buying them and paying loan/bond repayments

the down side to this is that governments can borrow money VERY cheaply

the question is therefore if this PFI scheme is looking ever more expensive, and now has to be classed as Govt borrowing, why don't the govt just buy the things?

Feckwits! And that includes the civil serpents AND senior arse-ifers who have overseen this horses-arse of a project. You clowns have cost the RAF a tanker force.

Game is up tanker drivers! There will be no more RAF tankers ...... ever! There is no more money, no more time. Enjoy what little AAR you do on the VC10 and Tri-shaw. It'll all be over soon.

Isnt this the wonderment of "Resource Account Budgeting" also known as "Governmet Level cooking of the books"?

Anorak Mode <<ON>>

I hate to be a finance anorak, but the on-balance sheet / off balance sheet hasn't got a great deal to with Resource Accounting (RAB) but quite a lot to do with the famed Golden Rule of then-Chancellor Gordon Brown.

As knowitall has (rightly!) said, the big presentational benefit of PFI for the government is that the contractor borrows the money and therefore it isn't public debt and therefore doesn't appear in the Public Sector Borrowing Requirement (PSBR).

Add in the "Golden Rule" (authors: G Brown and E Balls), which says that over the economic cycle UK will only borrow to invest (ie, no debt for provision of services in any one year), and that the level of debt will be "prudent" ie, c. 40% of GDP (vs 100%+ in Italy and 140%(?) in Japan), then the attraction for £3bn (0.2-0.3% of GDP) of debt on someone else's balance-sheet (AirTanker, in this case) is very attractive as it "isn't" public debt. (I would violently disagree, but who am I? Merely a taxpayer, of course).

The problem is that PFI = renting something, which is always going to be more expensive than buying it, as (i) companies borrowing money is more expensive than the government, because their credit rating is lower and (ii) they need to make a profit.

In short PFI only makes sense if the amount of cost over-run you expect from incompetence in the public sector is greater than the additional cost of borrowing and the profit you expect the private sector to make.

Note to 10 Downing Street,

Dear Prime Minister,

For F:mad:'s Sake, Gordon, borrow the bl**dy money and buy the damn things! And whilst you're at it, we'll have 20 x KC-30B with RR Trents, there's a good chap.....

Your sincerely,

S41

Anorak Mode <<OFF>>

Which is also why they are so desparate to get the NR clusterf*ck sorted out through a bond/private sector deal.

Off Balance Sheet Financing
 

The accountancy profession attempted to eliminate these Spanish practices years ago by requiring the full substance of such transactions to be reported...

FRS 5 Reporting the Substance of Transactions

Issued: April 1994

FRS 5 addresses the problem of what is commonly referred to as 'off balance sheet financing'. One of the main aims of such arrangements is to finance a company's assets and operations in such a way that the finance is not shown as a liability in the company's balance sheet. A further effect is that the assets being financed are excluded from the accounts, with the result that both the resources of the entity and its financing are understated.

FRS 5 requires that the substance of an entity's transactions is reported in its financial statements. This requires that the commercial effect of a transaction and any resulting assets, liabilities, gains and losses are shown and that the accounts do not merely report the legal form of a transaction.

For example, a company may sell (ie transfer legal title to) an asset and enter into a concurrent agreement to repurchase the asset at the sales price plus interest. The asset may remain on the premises of the 'seller' and continue to be used in its business. In such a case, the company continues to enjoy the economic benefit of the asset and to be exposed to the principal risks inherent in those benefits.

FRS 5 requires that the asset continues to be reported as an asset of the seller, notwithstanding the transfer of legal title, and that a liability is recognised for the 'seller's' obligation to repay the sales price plus interest.

PPP/PFI has always been dodgy in my book.

FP
ACMA

Squirrel, are you siure about that? IIRC the other gotcha under PFI & RAB is that if an asset is a PFI it is deemed to be off balance sheet then you the user (in this case it would be Air Cmd/2 Gp) would not pay the RAB "cost of capital" and "depreciation". If the asset is treated as on balance sheet then the user (Air Cmd) has to pay the RAB cost of capital and depreciation charges = UNAFFORDABLE in this case!!

Now of course these are only HMT accounting guidleines so the solution is simple - scrap the complete @rse that is RAB.

We are stuffed! The country is broke as are its soon to be heavily in-debted consumers who have been on a 10 year credit binge.

The trauma in the markets often takes 12-18 months to translate into the housing markets; prices will fall, MEW will stop and retailers will be up in arms as no one will have any money to spend. People will be laid off work; tax revenues will fall, just when we need the money the most. Inflation will increase (food/oil/etc are all getting more expensive as the cheap labour and imports from china revert to global averages) interest rates will go up to reduce the rate of inflation whilst the prices of goods also increase.

The only thing to do; hedge against the debts and inflation -

BUY GOLD!

Sage advice....


... which is why Gordon sold off quite a lot of our reserves at a low price a few years ago, despite advice that this was a bad idea. Prudence? I think not...

I think you have a point MrBernoulli- AR may well be in it's twilight as far as UK taxpayers are concerned. However there may be an alternative plan; namely The MOD's plan B ,- Tristars! they are still available at low cost, spares issues could be negated by sacrificing a number of Airframes, plus there is tried and tested corporate knowledge. It also avoids PFIs funded with sub prime loans peddled by sub prime financers who as sure as eggs will tie the ,MOD in irreversible knots. And the best bit of all? There will be a future for a three person flight deck!:D.

I was with a wg cdr many years ago who was all cock-a-hoop as he had just bought all the East African VC10 for £100k (all or each I am not sure). Of course they didn't come into service at £100k each.

No, but did they cost EIGHT HUNDRED MILLION POUNDS each either?

I shall enter my tuppence-worth here and use the quote from Gremlins 2.

" we're advising all our clients to put their money in canned food and shotguns"

not bad idea IMHO.

lets face it, fiscally this government is screwed. we are taxed left and right, its all spent on crap and quangoes and shiny chairs for main building. Labour have run this nation up its own arse and will now sit back and watch, safe in their protected salaried and guarded mansions.......

F%&K it I say we have a revolution...........

all in favour

Let's not forget it was Broon who b@st@rdised the word "investment" when he didn't want to say "spending increase", but how is the procurement of equipment for HM Forces not an investment worthy of state borrowing? Maybe HM should ask her PM?

"F%&K it I say we have a revolution..........."

We do have all the guns!!!!


oh oh, big black car outside.

what was that quote about PFIs transferring the risk to the private sector? Never mind, there's no money left in the kitty to buy any tankers, or carriers, anyway...

£2bn of public money goes down the Tube

Taxpayers will have to pay £2 billion to rescue the failed privatisation of London Underground, the Government admitted yesterday.

Ruth Kelly, the Transport Secretary, had to raid the Government’s contingencies fund to settle the debts of Metronet, which ran nine of the twelve underground lines but went bust in July.

The scale of the public liability for Metronet’s failure will be a severe embarrassment to Gordon Brown, who forced through the controversial Public Private Partnership of the Tube when he was Chancellor.

The payment also exposed the fallacy of the Government’s claim that it was transferring risk to the private sector. The five companies that owned Metronet – Balfour Beatty, Thames Water, EDF Energy, Bombardier and Atkins – had to pay only £70 million each towards the debt because they had won guarantees from the Government that limited their liability........

ORAC You beat me to it. Just finished reading a couple of articles on Metronet on the tube this morning.

So let's get this straight, New Liarbour can find £35 - 55 Billion to bale out Northern Rock and another £2 Billion to bale out Metronet.

Those 2 combined would more than solve the EP (or should that be PR) "bow wave"!! I think the government have their priorities a little screwed up. And buyt a few more machine guns for the guys on the front line (yesterday's Current Bun)

And today's Telegraph

Can't do that, they'd get through more ammo.

How about the £12billion being wasted so foreigners can come to London and show us how good they are at running, jumping, throwing sticks etc?

"show us how good they are at running, jumping, throwing sticks etc?"

All usual cliches about coffee and keyboards apply.

(In truth, I did laugh so hard that I scared next door's cat).

:) I fagu.

Talking of cliches, if MoD cut back on this seemingly bottomless pit of black Omegas...

well if there is a recession then air travel will fall and airlines will be only to willing to sell on some of their redundant airframes which will look in the press like a good buy until the costs of refurbishment and conversion are taken into account.
BTW I wonder if Tony's Mortgage for his London home is with Northern Rock?

Some interesting comments regarding FSTA here:

Coming back to haunt him: the billions in debt that Brown thought he'd buried. The Independant 24 Feb 08

DefenseNews: Executives: U.K. Refueler Deal Near Completion

LONDON - It's taken more than four years of talks, but senior executives from two of the companies in the consortium negotiating to provide Britain's Royal Air Force with a fleet of Airbus flight refueling tankers say they expect to seal the deal by the end of the month.

Thales U.K. Chief Executive Alex Dorrian told reporters here during a company briefing that he could see nothing to stop the deal from going ahead in the first quarter of the year, "unless the world comes to an end in the next fortnight."

Dorrian's view was echoed by Hans Peter Ring, EADS' chief financial officer. Speaking at the company's annual results presentation in Paris earlier March 11, he said the closing of the contract was due in the "next days or weeks."

EADS, Airbus' parent company, is the leading shareholder in the AirTanker consortium poised to complete a Private Finance Initiative (PFI) deal to supply 14 Airbus A330 air refueling aircraft to the Royal Air Force. They will replace Britain's aging fleet of VC-10s and Tristars. Other AirTanker shareholders are Thales, Cobham, Rolls-Royce and the VT Group. The consortium was nominated in January 2004 to provide the fleet of A330s to the RAF for tanking and transport duties.

The negotiations have been dogged by a series of delays, in part caused by the complexity of what is the world's largest defense PFI deal. At one stage, the MoD threatened to pull out of the negotiations after it tangled with AirTanker over the terms of the deal. Even at the last minute, AirTanker hit a hitch when efforts to finance the deal became a victim of the credit crunch. Moves to raise the 2.5 billion pound ($5 billion) cost of building the aircraft on the credit markets had to be abandoned. The money will be loaned from the banks instead.

A spokesman for AirTanker said the consortium members were "really confident now, we are very well placed to meet the March 31 date." An MoD spokesman confirmed the two sides were undertaking final steps to complete the negotiations. Industry executives here reckon the MoD could even announce completion of the deal before Parliament breaks for its Easter recess later this month..........

So by this point will it be Mr Northrop and Mr Grumman supplying Sir's tankers?

:sad: I read somewhere that the discussions on the scheme had cost £47m so far....... Just an ordinary bloke me, a taxpayer and all that. It does seem a lot of money to me, for talking....

G-A - yes indeed. How much are the tankers themselves?

Also heard that the KC-45 competition was "completely irrelevant" to the UK, and that we'd be stuck with our plainest of plain vanilla A330 tankers. After waiting so long for the damn things in the first place, it really takes the biscuit that we're not "reaping the synergies" of the US buy.

Out of interest has anyone (BEagle, Jacko, Pr00ne?) managed to disentangle the figures to work out the unit purchase cost of the FSTA and the comparable figure for the KC-45A, and then the differential life-cycle costs? It would be very interesting to see how much we're saving by giving up the higher-spec tanker.

S41

S41,

I found post #63 by FJ2ME in the "Northrop Grumman/EADS win USAF tanker bid" thread quite interesting.

:ugh:

Cheers, Transall.

"Also heard that the KC-45 competition was "completely irrelevant" to the UK, and that we'd be stuck with our plainest of plain vanilla A330 tankers."

your almost certainly right, though i would have thought that the ability to carry cargo on the main deck might be attractive to the bidding consortium, even if the boom wasn't

wishfull thinking on my part i know

the other advantage to that being buy a couple of paletized Exec suites and you can utilise any of the fleet in the "Blair force one" role