The first Italian PPP hospital project to follow the UK model has closed – for the first time lenders are taking service performance risk on an Italian healthcare project. Given the lack of precedents, the deal has taken 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.

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. Construction is scheduled to be finished in March 2008.

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 senior debt was lead arranged by ABN Amro, Banca Intesa and InterBanca, with Banco Antonveneto – the retail arm in the same group as InterBanca (Bancario Banca Antoniana Popolare di Veneta Group) – coming in as a lead underwriter: ABN Amro seems certain to make a successful takeover of Antonveneto which should give the Dutch bank a stronger foothold in the Italian project market.

Of the Eu130 million debt, ABN Amro is underwriting just under 50%, Banca Intesa 25%, and InterBanca and Banca Antonveneto 12.5% each.

Around Eu80 million of the hospital's cost is provided by the state. Originally this was to be disbursed toward the end of construction, which has already begun, 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 benefit, as stipulated by Merloni Law, is shared between the consortium and the public sector.

The difficulty with banking hospital deals in Italy is the uncertain creditworthiness of the local health care authorities (ASLs). It is not certain that in the event of default the regional authority would step in to pick up the existing debt. 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 Norton Rose, came to a decision that although there is no explicit provision or contract due to the rigidity of public law, such is the importance of the hospital to the local population that the Veneto regional authority would act as 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.

The more prosaic financing difficulties were ground through in negotiation; namely, the cultural collision between the Italian regional procurement agencies and a UK-style PPP concession agreement. A fair amount of time was also taken persuading the service providers to accept contracts for 24 years – the longest they had previously been contracted to was around seven years.

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 greatly assuaged by the involvement of the EIB. It is fair to say that without the EIB the project would not have been done.

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.

Syndication should follow quickly and take between four and six weeks: two or three more Italian and international banks are expected to join.

As a pathfinder project this deal should clear the way for other hospital deals to follow. Like the seminal Salerno-Reggio-Calabria II highway project that was the first GC scheme to close, Mestre has shown that deals that look destined to never get off the ground can be done without a change in legislation. And whilst Italian hospital deals should now be easier, two important caveats still apply: First, the credit strength of the region and its ability to act as a de facto guarantor must be assured; and second, the EIB is unlikely to participate in the same manner and to the same degree again.

Mestre hospital financing
Status: Closed 21 April, limited syndication expected
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 study (2%)
Arrangers: ABN Amro, Banca Intesa, InterBanca, Banco Antonveneto
Legal counsel to SPV: Lovells
Legal counsel to commercial banks: Norton Rose
Legal counsel to EIB: Allen & Overy