Collectif CHUM closed a C$3.17 billion ($3.21 billion) financing for the Centre Hospitalier de l’Universite de Montreal (CHUM) concession in Quebec on 9 June 2011. The deal was the first widely distributed B-rated private infrastructure bond in Canada and was by far the largest healthcare concession in North America last year.

The 38.8-year concession is for a new 280,000 square-metre hospital with 772 patient beds, plus retail and office space, and new parking facilities in central Montreal. It is located 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. The 8.8-year construction period is split into two phases, with operations beginning during the second and continuing for 30 years after substantial completion of the second. CHUM and Infrastructure Quebec awarded it to the Innisfree Secondary Fund (30%), OHL (25%), Laing O’Rourke (25%) and Dalkia (20%)-owned Societe en Commandite Sante Montreal Collectif, or Health Montreal, consortium in February 2011.

A Laing O’Rouke and OHL Construction 50/50 joint venture holds the C$1.99 billion fixed-price date-certain construction contract for CHUM. 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. BBVA provided a C$23.2 million backstop for OHL’s equity commitment to the project, while Societe Generale provided the sponsor with C$135 million of the project’s construction standby letter of credit requirements. Both facilities have a tenor of five years and benefit from guarantees from Cesce.

Construction has begun, with phase one scheduled to be completed in April 2016. Phase two is due to be finished in March 2020. Dalkia holds the 33.9-year facilities management contract, which begins once phase one is completed.

Royal Bank of Canada was sole underwriter and lead bookrunner of the C$1.371 billion senior secured bond issue. The 38-year issue priced at 315bp over the equivalent Government of Canada bond and yields 6.721%. The concessionaire will make interest only 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 to the project’s complexity and long construction period. For example, all construction works must take place on a constrained urban site and take place while operations continue at first existing Saint-Luc and later in the operational first phase of the project. It will also take five-and-a- half years longer to build than CR-CHUM.

The B ratings broke new ground for the Canadian market. The bonds attracted a different type of buyer, for example those that have higher allocation mandates for B-range rated assets. CHUM’s successful closing suggests that sponsors may no longer need to labour to structure deals that hit the country’s supposed single-A rating sweet spot.

Collectif CHUM did pay up because of the lower rating. Despite being oversubscribed, with 42 investors, the spread on the issue was 110bp wider than the comparable C$543.4 million 34-year bond for the Hospital Infrastructure Partners Oakville bond in July 2011. The long-tranche on Oakville, sponsored by Oakville Carillion, EllisDon and Fengate Capital, priced at 205bp over the equivalent GoC.

The sponsors are providing C$180.2 million in equity and deeply subordinated debt, and interest income on the bond proceeds will be C$76.9 million. The grantors will make C$895 million in contributions during construction, 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.

Miguel Fraile, vice president for Canada at OHL, says that negotiating and closing all of the necessary construction and facilities management guarantees before financial close was probably the most difficult aspect of the financing. Unsurprisingly, the sponsors have no plans to refinance the debt. He adds that OHL is now waiting for the results of the about C$995 million Centre hospitalier universitaire Sainte-Justine design-build-finance hospital modernisation in Quebec, which are expected in March.

Collectif CHUM
STATUS: Closed 9 June 2011
SIZE: C$3.17 billion
DESCRIPTION: 38.8-year design-build- finance-maintain concession for a new 772-bed hospital in Montreal, Quebec
GRANTOR: Centre Hospitalier de l’Université de Montréal
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
SPONSOR FINANCIAL ADVISER: Investec
GRANTOR FINANCIAL ADVISER: Raymond Chabot Grant Thornton
SPONSOR LEGAL: Blake, Cassels & Graydon
GRANTOR LEGAL: Fasken Martineau
LENDER LEGAL: McCarthy Tetrault
EPC CONTRACTOR: OHL (50%) and Laing O’Rourke (50%)
FM PROVIDER: Dalkia
TECHNICAL CONSULTANT: BTY (lender)
INSURANCE CONSULTANT: JLT (lender)
MODEL AUDITOR: Operis
TAX ADVISER: PwC (sponsors)
INDEPENDENT ENGINEER: Black & Veatch
FUEL CONSULTANT: Resource Recycling Systems
INSURANCE ADVISER: Moore-McNeil