Mestre: PPP UK-style

The Mestre Hospital project was both a transitional deal for the Italian project market and closed in a time of market transition. First, the project itself is the first Italian PPP hospital financing to follow the UK model. Second, three of the four commercial banks on the deal have since been brought together with ABN Amro's takeover of Banco Antonveneto.

Mestre is the first time lenders have taken service performance risk on an Italian healthcare project. Given the lack of precedents, the deal took a long time to put together – not only did the varying expectations of the public and private entities in the deal have to gel, but the EIB needed to get comfortable with committing itself under a new refinancing structure.

Throw into the mix the cultural gaps between the Italian and UK models of long-term service provision – a lengthy dialogue was needed to persuade the service providers to accept contracts for 24 years given the longest they had previously been contracted was around seven years – and the obstacles of Italian public law to lender comfort, and it is surprising that the Mestre hospital financing was pulled together at all.

Financial close had been anticipated in September 2004, but was delayed to secure the EIB's involvement and because of a change of shareholdings in the Astaldi-led consortium that is sponsoring the project.

The project is delivered through a special purpose vehicle – Veneta Sanitaria Finanza di Progetto. The hospital will be more than 200,000 square metres in size and will have around 700 beds. Construction is expected to be completed by the third quarter of 2007.

The financing comprises a main tranche of Eu110 million with a tenor of construction-plus 23 years, a Eu15 million VAT facility with an expected life of 5-6 years, and a Eu5 million working capital facility, reducing to Eu3 million on completion. The public contribution totals Eu100 million, and the sponsors' equity is Eu28 million. Construction is scheduled to be finished in March 2008.

The senior debt was lead arranged by ABN Amro, Banca Intesa and InterBanca, with Banco Antonveneto – the retail arm in the same group as InterBanca – coming in as a lead underwriter.

When the deal closed in April 2005, ABN Amro had tabled a bid for Banco Antonveneto that was subsequently successful. Although two of the key people that worked on the Mestre deal for ABN out of London, Andrea Echberg and Francesco Nale, have since left for Macquarie Bank, the takeover of Banca Antonveneto and its affiliate InterBanca gives ABN a very strong Italian project practice. The post-merger bank held 75% of the initial underwriting on Mestre.

Around Eu80 million of the hospital's cost is provided by the state. Originally this was to be disbursed toward the end of construction but the funds were available earlier. The Veneto region was to provide a bridge facility, so the early disbursement resulted in the project agreements being tweaked, and the overall cost was pared down slightly. The deal was originally structured around an 80/20 gearing ratio, but was slightly reduced by the early availability of public funds. The deal has an average DSCR of 1.44x. The benefit, as stipulated by Merloni Law, is shared between the consortium and the public sector.

Specifically, the difficulty with banking hospital deals in Italy is the uncertain creditworthiness of the local health care authorities (ASLs). In the UK this is overcome by the Residual Liability Act whereby the government effectively guarantees an agency acting as an arm of the state. There is no such law in Italy.
Instead, the lenders, using advice from a Norton Rose team, concluded that although there is no explicit provision or contract, such is the importance of the hospital to the local population that the Veneto regional authority was a de facto guarantor of the ASL with regards to its payments to the project. And fortunately the Veneto region is AA rated by S&P.

There are seven service contracts in all. Some of the banks were unused to dealing with the logistics and associated risks of relocating the existing hospital facilities within a tight timeframe. Given these difficulties, the concerns of the commercial lenders were helped by the involvement of the EIB.

The commercial lenders committed to the underwriting on the precondition that once the hospital was fully operational, upon the achievement of certain milestones within three years after construction, 65% of the debt pro rata would be taken out by the EIB. The EIB is a signatory to the underwriting agreement, but unusually its commitment to refinance is not cross-guaranteed by the commercial banks.

The costs of the EIB's involvement at the initial stage with cross-guarantees compared with this new structure are directly comparable. The one key advantage a committed refinancing on performance milestones has over the conventional method is that the EIB does not require guarantees. The EIB asks for very high credit ratings of the commercial lenders to ensure its guarantee is watertight. Therefore, the refinancing allows less creditworthy domestic lenders to participate in the deal at syndication when they would have otherwise been precluded.

Not that local participation was needed. Such was the international flavour of the deal with documentation based on English law-principles a successful syndication was finalised on 7 July 2005 with WestLB, RBS, Calyon, BBVA, BNL and MCC coming into the deal.

While the financing of Mestre hospital has set down a template, the credit strength of the region will be critical to future deals. Lower rated regions may find themselves snared in a Catch-22 without a central government guarantee – perhaps in need of key infrastructure more than other regions with healthier balance sheets, but find a similarly structured deal either too expensive or unfeasible.

Nevertheless, as a pathfinder project the Mestre deal should clear the way for other hospital deals to follow and may act as a spur for legislative changes. The evolution from the deal should see the next few hospital deals move from 80/20 to 85/15 gearing ratios and may use Italian rather than English as the governing law of agreements.

Mestre Hospital
Status: Closed 21 April 2005, syndication closed 7 July 2005
Description: Eu130 million bank debt for Italy's first UK-style PPP hospital
Sponsors: Astaldi (31%); Mantovani (20%); Gemmo systems (17.5%); Ceportex (17.5%); RPS Synergies (7%); Martello (5%); Altieri (2%)
Arrangers: ABN Amro; Banca Intesa; InterBanca; Banco Antonveneto
Sub-lenders: WestLB; RBS; Calyon; BBVA; BNL; MCC
Legal counsel to SPV: Lovells
Legal counsel to commercial banks: Norton Rose
Legal counsel to EIB: Allen & Overy