Victoria Hospital: Medical movement

The financing for the Hospital Regional de Alta Especialización de Ciudad Victoria public-private partnership project is one of two hospitals to be awarded by the Mexican government's Secretaria de Salud (ministry of health) under its new programme for highly specialised medical facilities. It is part of the federal government's wider public-private partnership initiative, known as PPS. The concession agreement included a number of complex features, particularly in its allocation of risk, which made its 23-year debt a challenge for financial adviser and sole lead arranger, Dexia.

Dexia Mexico arranged the P$825 million ($60 million) 23-year, senior debt and the P$60 million, 36-month revolving VAT facility. The debt is priced at 190bp over TIIE, the Mexican interbank rate, 130bp thereafter. The interest rate was then swapped into a fixed rate, based on the TIIE standing at roughly 8% at the time of financial close. Dexia's New York treasury provided this swap. The mortgage-style amortisation requires a minimum debt service coverage ratio of 1.15x.

The concession runs for 25 years; incorporating three months of design, 12 months of construction, and three months of pre-operation plus 23.5 years of operation. The sponsors are Marhnos, a large local building contractor, with an 80% stake, and IGSA Solutions, a joint-venture between Dalkia and IGSA, with a 20% stake. The project involves the design, construction, financing and operation of the 100-bed facility in Ciudad Victoria, in the state of Tamaulipas. Marhnos is responsible for construction, and IGSA Solutions is responsible for the operations and maintenance under a long-term service agreement.

However, the concession agreement also requires the consortium to supply the hospital's medical equipment, and maintain it for five years, before the clinical maintenance responsibility is transferred back to the government. The allocation of medical equipment risk to the sponsor is unusual and, while there are precedents for such a contract internationally, it is the first such transfer of clinical risk in Mexico. The other of the PPP hospitals to close so far, the Léon, Bajio concession, awarded to an Acciona-led consortium, involved only minimal risk transfer to the private partner. The government will make availability payments to the consortium over the life of the concession, at a higher rate during the first five years to reflect the inclusion of clinical services.

The clinical risk was the main point of contention in the deal: The financing was arranged in the aftermath of a major scandal at the privately-operated University Medical Center of Toulouse-Rangueil hospital in Toulouse, France, where 145 patients were overexposed to radiation during cancer treatment due to a fault with the equipment installation. The allocation of liability in this case was heavily disputed between the government, the hospital, and the equipment provider. As Dexia and Dalkia are both French companies, both of them focused on the due diligence required for determining risk allocation in the Ciudad Victoria deal.

The resulting arrangement was that Dalkia's parent company provided a guarantee to cover the clinical risk, which could be invoked if liabilities were greater than the project company's insurance covered. This guarantee meant that the pricing on the debt was not radically affected. The government's liabilities only begin in the event that any liabilities exceed a certain undisclosed threshold, which is said to be extremely high, but not inconceivable in terms of a lawsuit.

Another challenge facing the project's financing was that Marhnos used in-house legal counsel. While this arrangement did not delay closing the deal, it will affect Dexia's ability to syndicate or securitize the debt. Should the lender wish to get any of the debt off its balance sheet in the future, the financing will have to be re-evaluated by international legal counsel to the sponsor.

The 100-bed facility will serve patients requiring specialist care from a regional network of 16 public hospitals and 6 private clinics, which in turn serve the 580,000 population of Tamaulipas and 400,000 combined population of the neighbouring states of Veracruz and Hidalgo. The hospital will also include support services for more than 14 specialties, including among others, a neurological medicine unit, a surgical wing, oncology, physical therapy and rehabilitation, an intensive care unit, an outpatient department.

The Mexican PPS programme is now substantially underway, with nine of the proposed 22 pilot projects awarded across a number of sectors: six shadow toll road concessions, one university project and the two hospitals. According to Derek Woodhouse, counsel at Chadbourne & Parke, which represented the lenders on the deal, "The PPS scheme is being adopted by local governments and at least 22 Mexican states have already amended their constitution or legal framework in order to facilitate the implementation of PPS at a state and municipal level."

There are at least five more hospital concessions still to be awarded under the PPS programme, and there is likely to be a tussle between governments and prospective sponsors, as to how to proceed with upcoming concession structures. The two templates, in Bajio and Tamaulipas, differ remarkably from each other, and the government is anxious to transfer greater degrees of risk onto sponsors. Sponsors, while keen to get a piece of the PPS action, may balk, especially if their lenders grow wary of clinical and infrastructure risk mingling. While the consortium at the Ciudad Victoria hospital found ways to mitigate its clinical risks, future sponsors on such deals may see risk transfer having more of an impact on the cost of debt.

Infraestructura Hospitalaria del Noreste
Status: Closed 15 February 2008
Location: Victoria, Mexico
Size: $75 million
Debt: $65 million
Equity: $10 million
Sponsor: Marhnos (80%), IGSA Solutions, a joint-venture between Dalkia and IGSA (20%)
Arranger: Dexia Mexico
Financial adviser: Dexia Mexico
Lender legal: Chadbourne & Parke
Sponsor legal: In-house (Marhnos); Barrera, Siqueiros y Torres Landa (Dalkia local corporate counsel)
Independent engineer: IDOM
Insurance adviser: Interprotecciones