Acces Recherche Montreal, a consortium of Fiera Axium and Meridiam, reached financial close on the C$584 million ($555 million) Centre de Recherche (CR) at the Centre Hospitalier de l’Universite de Montreal (CHUM) hospital in May. The project, located in Montreal, Quebec, is the first healthcare PPP in the province and the deal is also a debut for Fiera Axium, which closed its first fundraising of C$175 million in February, and owns a 60% stake in the project company.

The project faced a number of obstacles on its route to financial close. The request for qualifications was issued in December 2007 for the research centre. But the project, along with the CHUM hospital PPP (due to be awarded in the fourth quarter of 2010) and its Anglophone counterpart the McGill University Health Centre (MUHC), were the centre of a number of disputes about the use of PPP as a suitable financing method. Bidders were also required to submit new best and final offers after financial proposals came in above the cap set by the province.

According to Bruno Candès, senior investment director and vice president at Fiera Axium, financial close was eventually achieved in under two months, once the consortium got the green light to proceed, but he notes that, “As it was the first healthcare PPP in the province, it was very sensitive. It was important to get it right.”

The financing is also notable as the largest Canadian bond issue to date for an infrastructure concession, though the McGill hospital bond financing is set to trump it imminently, so the title will be short-lived. The use of a bond bridge rather than a short-term bank loan for the construction period is also a market first. The 33-year concession was financed using a C$452 million ($429 million) bond issue, arranged by RBC.

The debt comprises a C$332 million 32-year tranche, which amortises over an average life of 23 years, and a smaller tranche of C$59.8 million with a three-year maturity, ranked pari passu with the senior debt, which the sponsor will use as a bridge loan until the milestone payments and completion payments are funded. If the short-term bonds are not repaid within the three-year period, they switch to a floating rate with a 2016 maturity.

The bonds priced on 20 May, during what Fiera says was a volatile week for the markets. The long bonds priced at a spread of 325bp over the equivalent Government of Canada bond, and will yield 7.067%. The short bonds priced at 215bp over their equivalent for a 4.041% yield. Moody’s rated the bonds A3, and DBRS rated them A (low). Debt service cover ratio is expected to be 1.38x over the life of the debt. The bond buyers were largely Canadian institutions. Fiera Axium’s Candès notes that the bonds were not CPI-adjusted and the nominal bond market in Canada is deep.

The province is providing two milestone payments during construction, each of C$57.4 million, in July 2011 and August 2012 and a C$74 million completion payment. After completion, the province will fund around 76% of the availability payments with grants of around C$1.1 billion over the term of the concession. Availability payments in the first year after construction will be C$42.6 million. The equity contribution is C$43.5 million, which, together with provincial contributions, the bond proceeds and $34 million in interest income fully fund the project.

Pommerlau and Verreault hold the C$425 million fixed-price, 40-month engineering, procurement and construction contract in a 50/50 joint venture. Construction is underway and involves 68,431 square feet of new facilities, including a 15-storey research and training building, a six-storey administrative centre and connection to the Champs-de-Mars metro station. The contract for the project includes joint and several guarantees, performance, materials and labour bonds each equivalent to 50% of the contract value, a 10% letter of credit and a 5% mezzanine liquidity support. Subcontractors will account for 85% of the contract’s value, including mechanical and electrical requirements. Honeywell has the 30-year facilities maintenance contract, which excludes clinical equipment. Other cost include a six-month senior debt service reserve of C$13.5 million, which is the only contingent liquidity, interest and fees (C$109.1 million) and additional fees and expenses (C$36.5 million).

Fiera Axium focuses exclusively on Canadian infrastructure. Candes says the fund views the Canadian regulatory framework as favourable and is pursuing a number of other opportunities, including renewables projects in Ontario and British Columbia. “We’re still raising capital and the mid-market is our sweet spot,” says Candès. He also believes that a more liquid secondary market is evolving in Canada, “which will create some interesting opportunities.” Meridiam has been more active, and has closed on ten projects to date globally, though CR-CHUM is its first Canadian deal. It has also been named preferred bidder for the St Joseph’s hospital concession in Ontario.

For Quebec, the closing of a first PPP may alleviate some of the political and public unease at the prospect of private-sector involvement in healthcare provision. Many sponsors also view the project as expanding on the Ontario precedent, and tip Alberta as the next province to follow suit with healthcare.

The CR-CHUM deal demonstrates a continued shift in sponsor appetite towards bond debt and some innovative ways for bond investors to gain exposure to acceptance payments, through the use of a short-term bond tranche. The financing may provide a model for the forthcoming financing for the CHUM hospital proper, for which Fiera Axium is also believed to be bidding (in a consortium with Acciona, HSBC, and Pommerleau). Another bid is expected from a consortium of Dalkia, Innisfree and Accor.

Acces Recherche Montreal
Status: Closed May 2010
Size: C$534 million
Location: Montreal, Quebec
Description: 33-year PPP concession to build a research centre at the CHUM hospital
Awarding authority: Centre Hospitalier de l’Universite de Montreal
Sponsors: Fiera Axium (60%); Meridiam (40%)
Equity: C$43.5 million
Bond arranger: RBC
Bond debt: C$452 million
Construction: 50/50 joint venture of Pommerleau and Verreault (a subsidiary of Dessau)
Facilities management: Honeywell
Legal advisers: Blakes, Cassels & Graydon (sponsors); Ogilvy Renault (lenders)
Technical adviser: Mott MacDonald