The McGill University hospital bond issue in July broke the Can­adian PPP market wide open. The C$764.1 million ($740 mil­lion) senior series A amortising bonds attracted 52 buyers – the most ever for a PPP bond – and set a new bench­mark for investor participation in Can­adian PPP deals.

McGill University Healthcare Centre launch­ed the request for qualifications for the new McGill healthcare facility in June 2007, to con­siderable market scepticism. The government of Quebec faced chal­lenges about whether a PPP was the ap­pro­priate method to finance con­struc­tion of the McGill and CR-CHUM projects.

After some delay, the request for proposals was released in October 2008 to the two in­ter­ested teams: Groupe immobilier santé McGill, led by SNC-Lavalin/Innisfree, and Partnerariat CUSM, led by John Laing/ OHL. The fallout from Lehman’s collapse fuelled further scepticism about both the capacity and the liquidity of the market, however. In response the government brought in a substantial completion pay­ment of 45% to make the deal more attractive.

Both teams submitted formal bids in Novem­ber 2009 but the two bidders were forced to resubmit their technical and financial proposals because, at more than C$1.6 billion, they were deemed too expensive. The two consortiums submitted final bids below the province’s C$1.343 billion construction budget cap in March and the grantor, McGill University Health Centre, awarded SNC-Lavalin/Innisfree the 34.3-year design, construction, financing and maintenance concession in June.

The sponsors explored the option of long-term bank debt, but found that 30-year money was not available. The sponsors and the government wanted to avoid the need for a refinancing, so the capital markets were the only viable option.

Before the McGill bond there were only a handful of institutions that regularly participated in private infrastructure bonds in Canada. The Centre de Recherche (CR) at the Centre Hospitalier de l’Universite de Montreal (CHUM) PPP C$452 million issue in May 2010 only had 18 participants, for example.

Unlike previous PPP bond deals, however, McGill had a formal road show and multiple one-on-one meetings. This allowed potential investors with little knowledge of infrastructure investment to gain an understanding of the project, and it soon became clear that investor appetite was substantial.

The sponsors initially planned to raise C$754.8 million with long-term amortising bonds when underwriters Scotia Bank, Casgrain and Dexia launched the deal in June. The bond was over three times oversubscribed, however, and they ended up raising C$764 million by the time it closed. This allowed the sponsors to reduce their equity contribution from C$220 million to C$191.8 million, split between pure equity (5%) and deeply subordinated debt (95%).

The C$764 million in bonds were the largest debt financing for an infrastructure concession in Canada to date, and sur­passed CR-CHUM’s deal by C$312 million. The large number of participants made for low margins. The fixed-rate McGill bonds priced at 290bp over the equivalent government of Canada bond for a yield of 6.632%. The bonds mature on 30 June 2044, and Standard & Poor’s gave the bonds an A- and DBRS an A low rating.

Other sources of financing include C$105 million in milestone payments, a C$245.3 million contribution from the grantor, towards the concessionaire building a parking facility from which the grantor receives revenues, and a $392.5 5.5-year bank loan that will be repaid entirely from a C$706.5 million substantial completion payment at the end of construction. Lenders on the bank debt were BNP Paribas, CIBC, Credit Agricole, Dexia, Royal Bank of Scotland, Scotia Bank and Sumitomo Mitsui Banking Corporation. This debt was priced at 220bp over Libor, with an 88bp commitment fee.

According to DBRS, lifetime debt service coverage ratio (DSCR) for the deal is projected to be 1.38x and gearing is 86%. However, if the sponsors decide to issue another C$61 million in debt after operations begin, DBRS said the DSCR would decrease to 1.27x.

The project company began construction in June on the 217,500 square metre hospital. SNC-Lavalin Services, a joint venture led by SNC-Lavalin Construction with Pomerleau and Verreault, is responsible for construction under a fixed-price date-certain contract. SNC is providing a guarantee of 55% of the C$1.57 billion contract price backed by a letter of credit for 10% of this. Contractor liability is capped at 55%, including 10.9% for liquidated damages.

The facility, located at McGill’s Glen Campus roughly 5km west of downtown Montreal, is scheduled to open in September 2014 and in­cludes 500 patient beds, 20 operating rooms, 3,000 square metres of retail space and a 2,735-space parking garage (not included in the operational PPP concession). SNC-Lavalin Oper­ations and Maintenance is responsible for routine O&M and Johnson Controls for lifecycle maintenance of tech­nical elements of the facilities. Operational revenues will be covered by availability payments (97.5%) from the province of Quebec and MUHC, with retail and interest revenue covering the remainder.

Regardless of what worked for McGill, other Canadian PPPs in the pipeline stand to benefit. McGill proves that privately-financed projects, with proper financial and contractual struc­turing, can at­tract broad debt market interest. Quebec’s other large hospital project, for cross-town rival l’Université de Montréal, is set to come to market this year, while Ontario, in particular, still has some large deals in its pipeline that will benefit from a broader bond market.

SNC-Lavalin Innisfree McGill Finance Inc.
Status: Closed 8 July 2010
Size: C$2.013 billion
Location: Montréal, Canada
Description: 34.3-year design, build, finance and maintain PPP concession for a new 217,500 square metre hospital
Awarding authority: McGill University Health Centre, advised by Infrastructure Quebec
Sponsors: SNC-Lavalin (60%) and Innisfree (40%)
Bond underwriters: Scotia Bank (lead), Dexia and Casgrain
Loan arrangers: BNP Paribas, CIBC, Credit Agricole, Dexia, RBS, Scotia and SMBC
Contractor: SNC-Lavalin Services
Facilities management: SNC-Lavalin O&M
Technical maintenance: Johnson Controls
Financial adviser to sponsors: Investec and SNC-Lavalin Capital
Financial adviser to government: PwC
Legal adviser to sponsor: McCarthy Tetrault
Legal adviser to lenders: Ogilvy Renault (Lead transaction); McMillan (Intercreditor issues)
Legal adviser to government: Fasken Martineau
Technical adviser: Mott MacDonald
Insurance adviser: Jardine Lloyd Thompson
Model Auditor: Operis