The financing for the Braga hospital PPP in Portugal involved successfully separating and allocating risks between a clinical services (ClinicCo) and infrastructure (InfraCo) concession to build a bankable deal. Though it took four years from first tender to close, the deal came in well structured and with sub-200bp debt pricing.

The Eu190 million ($269 million) debt is divided into two tranches – a Eu140.05 million piece backs the conventional PPP infrastructure concession of 30 years, and a Eu44 million piece backs the 10-year clinical services concession.

The main term loan on the InfraCo side was adjusted to reduce the tenor from 15 to 12 years, with the debt finally comprising a 12-year (9-year average life) Eu105.25 million term loan, a Eu25 million equity bridge with a tenor extending to six months after construction and a Eu9.8 million debt service reserve account (DSRA).

Pricing on the term loan is 175bp over Euribor during construction, 180bp in operation until year nine and 190bp from years nine to 12. The DSRA pays 175bp, and the equity bridge 150bp.

When financing a clinical concession, the main challenge is fairly allocating risk to satisfy all parties. In the case of Braga, this required extensive negotiation, due diligence and legal drafting, not only to make the sponsors, procurer and banks comfortable, but to enable insurance to be underwritten. It was this allocation of risk that delayed the ClinicCo hospital concessions in Portugal and ultimately contributed to the template's demise.

Extra documentation was also required to make lenders comfortable with the possibility of a new clinical concessionaire part of the way through the infrastructure concession – the clinical concession is a 10-year renewable contract.

Banks did not take any clinical risk, which is absorbed by the ClinicCo concessionaire, but there are some pass-through penalties to InfraCo for predefined failures. The infra concession is based on a traditional hospital PPP availability mechanism, and the clinical concession is based on a detailed performance grid detailing penalties and deductions to the availability payments. The ClinicCo availability payments comprise a minimum fixed and variable component, and it is broadly recognised that the contract sets a high and exacting standard for the ClinicCo sponsor, Jose de Mello.

The debt financing backing the clinical concession comprises equipment-leasing facilities of Eu34 million with tenors ranging from 36 to 84 months, and a Eu10 million down payment structured as a five-year bullet. The leasing facilities have an in-built return – the down payment has a margin of 150bp and the benefit of a full sponsor guarantee. The ADSCR is 1.23x, and the LLCR is 1.19x.

CaixaBI is sole underwriter on the deal, but will distribute two-thirds of the infrastructure debt – it will sell around Eu100 million of it down in two pieces of around Eu50 million, in the first and second quarters of this year.

As well as bank changes, the deal saw some changes on the equity side: the sponsors Somague, Jose de Mello Saude and Edifer altered the ownership structure so that Mello is 99.9% owner of the ClinicCo and Somague is majority owner of InfraCo.

The deal was able to achieve such competitive debt pricing because in the Portuguese system there is little flexibility to alter the bid from BAFO to financial close; a project whose costs go beyond its NPV threshold is unlikely to be ratified by the Accounts Court.
The sponsors and CaixaBI tried to make the project as bank-friendly as possible within the bounds of the NPV threshold by moving the majority of the availability payments to the first eight years of operation, which reduced the average tenor. After year eight, 80% of the debt is repaid.

CaixaBI and other lenders to the deal also benefit from being lent 50% of the debt from the EIB to on-lend to the project – this gives banks some certainty of funding costs. The EIB was reluctant to lend into the project directly because of the complexity of the interface between the clinical and infrastructure concessions. The EIB margin is comprised of its AAA capital market funding cost plus costs associated with the project financing and a margin for risk – the cost of this type of EIB facility therefore varies from one bank to another.

The new Escala Braga university hospital, with a 706-bed capacity and around 1,800 people/employees, has clinical areas of around 99,000m2, within a total 140,000m2 building area. The hospital will replace the present São Marcos Hospital, with the project company managing the old hospital during construction. According to financial adviser KPMG, the total defined government payments set in both SPV's on the project generated a 22% saving compared with a public sector comparator.

Braga Hospital
Status: Financial close 16 February 2009; concession agreement signed 11 February
Description: Eu190 million debt backing 30-year hospital infrastructure concession and 10-year renewable clinical services concession for Braga hospital, Portugal.
Sponsors: Somague; José de Mello Saúde; Edifer
Financial adviser to the government: Banco BPI
Financial adviser to the sponsors: KPMG II – Consultores de Negócios
Lead arranger: CaixaBI
Sponsor legal counsel: Vieira de Almeida
Bank legal counsel: António Frutuoso de Melo