Bristol Southmead closed at a time of uncertainty about the sources of, and terms for, funding available for PFI projects. That it could obtain 30-year fully amortising commercial bank debt was a pleasant surprise to sponsors, and demonstrated that banks were willing to provide long-term funding, with­out cash sweeps, at competitive margins.

Bristol City Council gave planning per­mission for the project in April 2006. Carillion, Skanska and Bovis Lend Lease emerged as bidders for the deal later that year, and Royal Bank of Canada was select­ed as the NHS’s financial ad­viser. Bovis withdrew its bid at the end of 2007, however, saying that design plans were insufficiently developed. Selection of a preferred bidder was originally due in 2008, but was delayed until the following year. The North Bristol NHS Trust selec­ted a 50:50 joint venture between Caril­lion and Lloyds Banking Group as prefer­red bidder in March 2009.

In the time between the opening and close of bidding, the financial crisis had completely changed the market land­scape. Unsure of the capacity of the bank market, the sponsors’ financial adviser HSBC explored the option of an adjudication bond against the backdrop of the collapse of the monoline bond insurance industry. It sounded out the market on a deal with hypothetical unwrapped bonds rated either A or BBB, with each rating dependent on more or less strength in the construction surety package and enhanc­ed debt service coverage ratios.

Though the sponsors did not go as far as seeking ratings from the agencies, the advisers found some demand for the hypo­thetical paper, notably from pension funds. On the basis of the underlying reference rate, the long-term unwrapped A or BBB paper would have cost the project 25bp-30bp more than long-term bank swaps.

Time constraints as much as pricing, however, led the spon­sors to choose the bank debt option. It was clear that a Conservative-led government would offer no promises that PFI projects still in financing would close, and with the general election looming in May, HSBC started work on a long-term bank deal in October 2009.

There was strong appetite from both local and international banks, and the sponsors were able to choose those that would agree to provide long-term money and, just as importantly, those that could go through credit committee and deliver promptly. Lloyds was selected as pathfinder bank, and obtained credit approval for the full underwriting of the commercial debt. With Lloyds at the helm, a five-strong bank club came together by the close of the year.

Negotiations went smoothly and, more importantly, quickly. Consequently, the final debt package was agreed in February. This package comprises £375 million ($603 million) in commercial debt and a £250 million European Investment Bank loan. The commercial debt, led by Lloyds and RBS, is split between a £265 million senior 30-year term loan, a £98 million equity bridge with a 5.5-year tenor, guaranteed by Lloyds, and a £13 million change-in-law facility also with a 30-year tenor. Lloyds took £150 million, RBS took £75 million and Credit Agricole, Nation­al Australia Bank and Societe Generale supplied £50 million each.

Lloyds was keen to keep pricing competitive and found no opposition on this point from the rest of the bank club. Pricing on the 30-year commercial debt starts at 230bp during the 67-month construction period. It then drops to 215bp during the first 10 years of operation, rises to 235bp for the next ten years before reaching 260bp until maturity. The equity bridge has a margin of 160bp. Commitment fees are half the starting margins on all commercial tranches. The margins on the EIB tranche are significantly lower, starting at 70bp dur­ing construction and then dropping to 40bp for the operation period. The debt to equity ratio is 85:15 and the average annual debt service coverage ratio (DSCR) is 1.22x whereas the minimum loan life DSCR is 1.27x.

Lloyds’ decision to take a 50% equity position in the project is in line with a number of similar investments in PFIs in 2010, including a 33% stake in the Birmingham Highways PFI and 43.5% in the Two Counties Police PFI. These hold­ings have led to speculation that Lloyds intends to close its mooted European infrastructure fund in the near future.

The Bristol Southmead project involves building a new hospital to house the main services of the current Southmead and Frenchay hospitals. The £626.6 mil­lion in project costs breaks down into around £450 million in construction costs and £175 million of facilities management costs. The 115,000m2 site will in­clude 800 acute beds (75% of which are in single rooms), 24 theatre suites, a 28-bed community hospital, a helipad, a piazza and a 2,700-space multi-storey car park. Start of operations is set for 1 Octo­ber 2015, at which point Carillion will be responsible for hard facilities man­agement, such as estates maintenance and utilities management, and the operation of retail facilities.

Bristol Southmead demonstrated early on in 2010 that banks were willing to provide long-term debt financing for large-scale PFIs. Financial close arrived quickly through a supportive bank club offering attractive margins, and provided a clear indication of the lending capacity of commercial banks in the coming year. 

The Hospital Company (Southmead) Limited
Status: Financial close 25 February 2010
Size: £626.5 million
Location: Bristol, UK
Description: 35-year concession for the development and maintenance of a new 800-bed acute hospital
Sponsors: Carillion (50%), Lloyds (50%)
Mandated lead arrangers: Lloyds; Credit Agricole; National Australia Bank; Société Générale; Royal Bank of Scotland.
Multilateral lender: European Investment Bank
Financial adviser to the NHS Trust: Royal Bank of Canada.
Financial adviser to the sponsors: HSBC
Legal adviser to the NHS Trust: Bevan Brittan
Legal adviser to the sponsors: Linklaters
Legal adviser to the lenders: Allen & Overy
Legal adviser to the EIB: Slaughter & May