Reaching financial close on the C$535 million ($454 million) New Niagara Health System Health-Care Complex and Walker Family Cancer Centre in St. Catharines required monumental efforts from the Province of Ontario and initial sponsor Plenary Group.

The financing, which closed on 27 March 2009, was the first for a design-build-finance-maintain concession in the province since the credit crisis hit. Several adaptions had to be made, most notably in Ontario making up for part of a shortfall in the financing requirement by providing milestone payments. Initial sponsor Plenary Group brought in another equity participant, Borealis Infrastructure and the project was de-levered from an initial 90/10 debt-equity split to around 83/17.

The project suffered from outstandingly unfortunate timing: the Niagara Health System and 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 – just before Lehman collapsed.

"By far the biggest challenge was trying to rebuild a financing in October 2008," says Martin Stickland, senior vice-president at Plenary Group. "Lenders were still working out what they could and couldn't do. Some lenders that were normally comfortable lending 30 years one moment said they could do shorter tenors and the next moment said they couldn't lend anything. It was changing on a day-to-day basis."

The hospital, with support from the Ontario government, is providing C$184.7 million in back-ended construction milestone payments, on top of C$275.2 million in acceptance payments. In return, the project company must test the market for a refinancing every six months to see if it can take out the milestone payments, and is obliged to carry out a refinancing at the province's request. Any increase in the cost of debt from this refinancing will be borne by the province, not the private sponsors.

A refinancing will also need to receive a ratings affirmation. The average debt service coverage ratio on the deal is 1.65x.

The debt for the project splits 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. The bank 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.

TD held both the bank and bond tranches together while the deal was restructured, and Borealis Infrastructure, which manages the infrastructure investments of the Ontario Municipal Employees Retirement System, also helped salvage the deal. Borealis Infrastructure was not a member of the consortium when it won the concession. Total equity is C$61.5 million, with Plenary Group and Borealis Infrastructure as 50/50 joint shareholders in the common stock of the project company. Borealis also holds some preferred stock.

The Niagara Hospital 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 and concession counterparty 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 Niagara Hospital is the first hospital financed in Ontario where the final design is fundamentally different from the illustrative design.

The project benefits from a fixed-price, turnkey, design-build contract with PCL, with 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.

Although the milestone-payment support in the financing is unlikely to be repeated, its use as a solution to a debt shortfall, while not perfect, illustrates the lengths to which Ontario will go to get its deals closed. The deal's legacy is not in its repeatability but as a strong signal to the market that Ontario remains fully committed to the DBFM model.

Plenary Health Niagara
Status: Closed 27 March 2009
Size: C$535 million
Location: St. Catharines, Ontario
Description: 33.7-year concession for a new DBFM hospital
Awarding authority: Niagara Health System (advised by Infrastructure Ontario)
Sponsors: Plenary Group and Borealis Infrastructure
Equity: C$61.5 million
Debt: C$289 million, split into 4-year construction loan, and long-dated 34-year tranche
Construction debt arrangers: Societe Generale, TD Bank and Bank of Montreal
Joint bookrunners: TD, RBC and BMO
Lender legal counsel: Fasken Martineau
Borrower legal counsel: Davies Ward Phillips & Vineberg
Government legal counsel: Bennett Jones (mandate since moved to Torys)
Government process adviser: Deloitte
Insurance adviser: Marsh