The first private infrastructure deal rated below A to hit the Canadian market - Collectif CHUM closed a C$1.371 billion ($1.39 billion) senior secured bond issue for the 38.8-year Centre Hospitalier de l’Université de Montréal (CHUM) concession on 9 June. The sponsors paid for the lower rating with a wider spread than similar deals, but the issue proved that there is significant investor appetite for slightly riskier infrastructure credits. Even though the deal features a construction period of almost nine years, and negative carry issues to match, banks still could not compete with Canada’s increasingly liquid PPP bond market.

The 30-year design-build-finance-maintain hospital concession is by far Canada’s largest to date. The two-phase, 8.8-year construction period includes a new 280,000 square-metre facility with 772 patient beds, plus retail and office space, as well as new parking facilities. The hospital will be located in central Montreal, on the same site as the existing Hopital Saint-Luc and next to Fiera Axium and Meridiam’s C$534 million Centre de Recherche (CR) CHUM concession. In February 2011, CHUM and Infrastructure Quebec awarded the C$3.17 billion project to Health Montreal, which is known locally as Société en Commandite Santé Montréal Collectif, and whose sponsors are Innisfree Secondary Fund (30%), OHL (25%), Laing O’Rourke (25%) and Dalkia (20%).

Financing for the hospital includes a combination of bond debt, equity, interest income on bond proceeds as well as milestone, substantial completion and availability payments. In addition to the bond issue, the sponsors are contributing C$180.2 million in equity and deeply subordinated debt, interest income will be C$76.9 million and the grantors will make C$895 million in contribution payments, a C$95 million parking payment and, during the second phase of construction, C$550 million in annual availability payments. These will cover the C$1.99 billion construction contract, C$839 million in financing charges, including fees and capitalised interest, and C$108 million split equally between the debt service reserve account and operating costs during the second phase of construction.

Royal Bank of Canada (RBC) was sole underwriter and lead bookrunner of the bonds. The 38-year issue priced at 315bp over the equivalent Government of Canada bond and carries a yield of 6.721%, slightly higher than the grantor’s all-in interest rate assumption of 6.5%. The concessionaire will make interest payments only on the debt until six months after substantial completion, which is currently scheduled for March 2020. The average debt service coverage ratio is 1.25x, according to DBRS.

DBRS and Moody’s rated the bonds BBB and Baa2, respectively. Both agencies attributed their ratings, which are lower than the typical low A-range ratings associated with Canadian infrastructure assets, to the project’s complexity and long construction period. For example, all construction works must take place on an urban site that is less than two city blocks in area alongside continuing operations at Saint-Luc. In addition, it will take more than double the four years needed to build SNC-Lavalin and Innisfree’s C$1.57 billion McGill University Health Centre (MUHC), which is also in Montreal.

The sponsors are paying for that complexity. The spread on the debt is 115bp wider than that on the C$1 billion long bond for Plenary’s Long-Term Accommodation project that closed in January, the last large Canadian PPP deal in the market. LTAP priced at 200bp over the equivalent GoC bond and was rated A by both DBRS and Standard & Poor’s.

In addition, the sponsors and grantor must swallow C$811 million in negative carry on the bonds. Sources close to the financing say that a bank versus bond competition was conducted before financial close and that the bond option was still priced lower than a comparable bank loan, a reflection of the health of the Canadian project bond market. The proceeds of the issue will fund phase one of construction while the grantor’s contribution payments and sponsors’ equity will fund phase two.

Despite the lower ratings and a complex construction plan, the bonds were oversubscribed. RBC attracted 42 investors to the issue, including home-grown infrastructure finance heavyweight Caisse de dépôt et placement du Québec. While this is less than the around 50 that came in on the MUHC issue in 2010, it is on par with other deals in the market recently and indicates that the lower rating did not deter investors. In addition, various local lenders say the bonds attracted a different type of buyer, for example those that have higher allocation mandates for B-range rated assets. Sponsors in Canada have typically laboured to structure deals to hit the country’s supposed single-A rating sweet spot. CHUM’s closing suggests that they do not have to hew so closely to market orthodoxy.

The grantors launched CHUM, along with the CR-CHUM and MUHC concessions, in 2006. The original cost estimate for the hospital was C$850 million. An OHL/Innisfree/Acor/Dalkia consortium and Acces Sante CHUM (Babcock & Brown/Acciona/Pomerleau) were prequalified by Infrastructure Quebec, then Partenariats Public-Prive Quebec, to submit bids for the project in November 2007. However, the process was delayed due to disputes over whether the PPP financing model was suitable for healthcare concessions. The province increased work fees for the prequalified consortiums to C$15 million from C$7.5 million as a result of this, in October 2009.

Acces Sante CHUM, which then consisted of Acciona, Fiera-Axium and HSBC after the bankruptcy of Babcock & Brown, submitted the only bid for the hospital in March 2010. However, it was above the grantors’ affordability ceiling of C$1.294 billion. In response, they agreed to delay the procurement again and revise the concession. The grantors increased the affordability ceiling to C$2.089 billion, reduced the length of the concession to 30 years from 35 years and the all-in interest rate to 6.5% from 8%.

Acces Sante CHUM and Collectif CHUM both resubmitted bids for the project in February 2011. The former was disqualified because it was over the ceiling while the latter was just within. According to Infrastructure Quebec, Collectif CHUM was able to reduce the cost of the project in its bid by submitting a shorter construction phase than was originally outlined in the request for proposals.

A Laing O’Rouke and OHL Construction 50/50 joint venture holds the C$1.99 billion fixed-price date-certain construction contract. This is backed with a 50% parent guarantee, letters of credit for 17% of the phase one contract value and 25% of the phase two value, and a 12.5% performance bond provided by Zurich and Liberty Mutual.

The equity and construction contract commitments provided an opportunity for export finance lender involvement. BBVA provided a backstop for a C$23.2 million ($23.7 million) equity commitment from OHL to the project, while Societe Generale had also provided OHL with C$135 million ($138 million) of the project’s construction standby letter of credit requirements, an instrument which is comparable to a performance bond. Both facilities have a tenor of five years benefit from guarantees from Spanish export credit agency Cesce.

Phase one includes site excavation, construction of five buildings and demolition of one. It is scheduled to be complete in April 2016. Phase two includes the transfer of patients from Saint-Luc and demolition of the facility, completion of the main 24-floor tower begun during the first phase and construction of one new building and a parking garage. It is scheduled to be complete in March 2020. Dalkia holds the 33.9-year facilities management contract, which begins once phase one is completed.

Health Montreal Collective
Status: Closed 9 June 2011
Size: C$3.17 billion ($3.21 billion)
Location: Montreal, Quebec
Description: 38.8-year design-build-finance-maintain concession for a new 772-bed hospital
Grantors: Centre Hospitalier de l’Université de Montréal and Infrastructure Quebec
Grantor contributions: C$990 million (not including C$550 million in availability payments during phase two of construction)
Sponsors: Innisfree Secondary Fund (30%), OHL (25%), Laing O’Rourke (25%) and Dalkia (20%)
Equity: C$180.2 million (not including C$1.4 million in commercial revenue during phase two of construction)
Debt: C$1.371 billion (not including C$76.9 million in interest income during construction)
Underwriter: Royal Bank of Canada
Legal counsel: Blake, Cassels & Graydon (sponsors), Fasken Martineau (grantors), McCarthy Tetrault (lender)
EPC contractor: OHL (50%) and Laing O’Rourke (50%) joint venture
FM provider: Dalkia