The Canadian province of Ontario reached financial close with a Plenary-led consortium on the C$535 million ($454 million) Niagara hospital project on 27 March. The financing is the first for a design-build-finance-maintain concession in the province since the credit crisis hit. It closed by falling back on the resources of domestic lenders and equity providers, and because the province committed a generous slug of progress payments to compensate for weak lender appetite.

Niagara Hospital, located in west St Catherines, is designed to replace two existing community hospitals, and combine acute and ambulatory health care services, including cardiac catheterization, radiation therapy and longer-term mental health treatment at a single 375-bed site. The awarding authority is Niagara Health System, 90% of whose payment obligations under the concession agreement will come from the province's Ministry of Health and Long-Term Care.

The system and its adviser Infrastructure Ontario issued a request for qualifications in November 2006, shortlisted bidders for the hospital in February 2007, issued the request for proposals in August 2007, selected Plenary as preferred bidder in August 2008, and reached commercial close with the consortium in September. "Despite the financial market conditions," says Vas Georgiou, senior vice-president, project delivery, at Infrastructure Ontario, "the financing closed with the same spread that was agreed at commercial close and with the same amount of equity."

The project was long billed as the hospital on which the design-build-finance-maintain (DBFM) concession structure would come of age in Ontario. The province uses a term called Alternative Financing and Procurement to cover both DBFM concession and build-finance turnkey projects. Its DBFM hospitals have to date used detailed designs that limit sponsors' input on hospitals' specifications. On Niagara, and on future hospitals, the province will use output- and performance-based requests for proposals and leave the design of hospitals to proponents, using only an indicative design for comparison purposes.

The debt for the project has been split into C$155 million of 4-year construction debt and a $134 million 34-year long-dated private placement tranche. The arrangers on the construction debt were Societe Generale, TD Bank and Bank of Montreal, of which the only foreign presence is SG, possessor of a small Canadian deposit base. This debt will be repaid with a portion of the acceptance payments from the province to the borrower.

The underwriters of the private placement were TD, RBC and BMO, with the bonds placed with a group that includes Sun Life Financial, the Great-West Life Assurance Company, Industrial Alliance and Bimcor. Notable by their absence from the financing are Deutsche Bank, which previously enjoyed a strategic relationship with Plenary but has stepped back from the market, and WestLB, which is thought to have looked at participating in the bank piece, but ultimately declined.

Notable by its presence is TD, which essentially held both the bank and bond tranches together while the deal was restructured, and Borealis, which manages the infrastructure investments of the Ontario Municipal Employees Retirement System. Borealis was not a member of the consortium when it won the concession, but is now providing the majority of the project's C$61.5 million in equity.
The mix effectively exploits Canadian appetite for infrastructure exposure at the extreme ends of the yield curve. The financial crisis justified the grip that conservative domestic players have on Canadian banking, and the Niagara financing will validate the cautiousness of both Canada's banks and Infrastructure Ontario.

The second-largest source of financing for the hospital is the Ontario government, which is providing C$184.7 million in construction progress payments, on top of a larger-than-normal C$275.2 million in acceptance payments. In return, the project company must, at the request of the awarding authority, go to market and see if lender appetite exists for additional debt to refinance the progress payments. According to IO's Georgiou, the details of how the refinancing would be approved have yet to be settled, though he stresses that this would take place at the province's option.

The project benefits from a fixed-price, turnkey, engineering, procurement and construction contract with PCL, which is providing a C$78.2 million letter of credit to provide liquidity during construction. Johnson Controls will be the provider of hard facilities management to the hospital. According to Standard & Poor's, which rated the debt A, the project differs from other Canadian DBFM hospitals by having more severe deductions to the concession's availability payments, but a reduced likelihood of these happening.

The financing structure for Niagara was described recently by one outside sponsor as "destined for the dustbin of history," a harsh assessment designed to scotch any notions that the deal might serve as a template for post-crunch DBFM hospital financings. But the province and its proponents completed a deal in trying circumstances, and also managed to maximise the available sources of equity and long-dated debt.

But refinancing the government contribution on Niagara will be very difficult, because the rating on the debt is unlikely to creep up much, if at all, upon completion, and the project must receive a ratings affirmation upon a refinancing. The average debt service coverage ratio on the debt as it stands is 1.65x, indicating that will be difficult to refinance the C$187 million without disturbing the existing C$134 million in debt.

Niagara does not mark a shift in the amount of operational or clinical risk that is transferred to the private sector, though the design risk transfer will be highly influential on forthcoming financings. The next wave of projects including Toronto South, the Womens' College Hospital, and a new forensics centre, have also evidenced strong interest from foreign sponsors and lenders.

Plenary Health Niagara
Status: Closed 27 March 2009
Size: C$600 million
Location: St Catherines, Ontario
Description: 33.7-year concession for a new DBFM hospital
Awarding authority: Niagara Health System, advised by Infrastructure Ontario
Government contribution: C$184.7 million
Sponsors: Plenary Group and Borealis
Equity: C$61.5 million
Debt: C$289 million, split into 4-year construction loan, and long-dated 34-year tranche
Construction debt providers: Societe Generale, TD Bank and Bank of Montreal
Long-term debt arrangers: TD, RBC and BMO
Lender legal counsel: Fasken Martineau
Borrower legal counsel: Davies Ward Phillips & Vineberg
Government legal counsel: Bennett Jones
Government process adviser: Deloitte
Insurance adviser: Marsh