Termsheet: Project Hospital: seeking value for money

Construction of the new Royal Hospital for Sick Children in Edinburgh commenced immediately, after lender Macquarie Capital announced £185 million (€258.4 million; $273.6 million) in debt financing with institutional investors, the European Investment Bank (EIB) and M&G Investments. Completion is expected in 2017.

The non-profit distributing (NPD) deal, a variation on a public private partnership (PPP) or project finance initiative (PFI), took around a year to complete after Macquarie became the preferred bidder. Macquarie achieved 15 percent savings through financing enhancements for local authorities Scottish Futures Trust (SFT) and the National Health Service (NHS) Lothian, it said in February.

The savings were made by creating two slices of senior debt in the structure, not typically seen in project finance deals, for the £150 million hospital. The three tranches include £150 million in senior debt, £20 million in senior subordinated debt, both provided pro-rata by the EIB and M&G, and a third tranche of £15 million in subordinated debt and pinpoint equity. The loans mature in 23 years. The third tranche of junior debt, provided by project sponsor Macquarie, sets the deal further apart from other PPP deals, in that it is designed to limit the returns that can be paid out to the project sponsor, via a nominal coupon rather than an inflation-linked return.


The structure has the advantage of being cheaper than the standard loan usually backing these deals, especially on the bond side, Peter Jacobs, head of project finance in Western Europe for the EIB, tells Private Debt Investor. “It’s financial engineering, translating to value for the authority.”

Mark Bradshaw, head of PPP at Macquarie, confirms that the two different tranches of senior debt are the innovation in the structure: “It’s a more complicated structure than other projects that have been closed. And it’s the first NPD that’s had this sort of structure.”

The £150 million senior debt was priced on a blended basis of 3.08 percent and the £20 million senior subordinated debt at 4.55 percent, also on a blended basis, PDI understands. Both M&G and the EIB hold pro-rata shares of the debt, ensuring common interest between the lenders and minimising risk of potential conflict of interest. The senior debt is subject to standard syndication rights and the junior debt includes standard change of control rights.

M&G, an established infrastructure investor, was picked to back the project as they could offer financing which enhanced the senior debt tranche, at more attractive levels compared to the market, Jacobs says. The all-in cost of project finance in the market at present is approaching the 100 basis point mark, which is not that far off pre-crisis funding levels of 70 to 75 basis points, Jacobs says. Macquarie declined to disclose financial terms. NHS Lothian and M&G also declined to comment.


PPP/PFI is a contract between a public sector authority and a private party to fund and operate a government service or private business venture. PPP models have evolved as a result of government authorities getting their fingers burnt in the past, industry sources say. Before PPP/PFI, governments would simply sign a contract with the cheapest bidder. But sometimes the average cost-over runs were in the order of 40 percent, one source says. But despite the rebrand, the private sector’s role continues to face strong criticism.

In the run up to the credit crunch, markets were so liquid that it was possible for project sponsors to take extra profits “by putting portfolios together and gearing up the equity and there was no claw back from government for that benefit”, a source says. Refinancing would also take place, without the government (and in turn the taxpayer) seeing any of the benefit either, he adds.

“Governments had to learn to improve the structure or the terms of the underlying contract and the concession to make sure it was fairer for them,” he says.


Bank funding for infrastructure projects dried up in the wake of the credit crunch. An escalation in government austerity also meant that projects, as well as the PPP model, fell out of favour. However, funder appetite is certainly back, and certain countries are seeing more deal flow.

A number of deals have closed in Scotland recently. Transactions on two hospitals were closed in early 2015, as well as two transport deals last year. “The EIB generally thinks that Scotland has all the right agencies in place to do high-quality style PPPs with Scottish Future Trust (SFT) and Trust for Scotland,” Jacobs says.

Between 2011 and 2012, SFT started working on the £2.5bn NPD programme, in a bid to address scarce capital for public infrastructure. The now £3.5bn revenue funded programme is one of the biggest of its kind in Europe.

In a bid to secure better terms for taxpayers, surplus returns from the hospital project are designed to be returned to the government. “[In] this particular PPP delivery structure Scotland uses, there is an A share and a B share in the equity. The B share sits with the government, the A share sits with the private sector. But effectively there is no dividends paid on the A share. The private sector only receives a nominal coupon from their subordinated debt or their junior debt,” Bradshaw says. The NPD approach ensures the government receives all surpluses that are created during the project above an agreed fixed return on the junior debt.


The Macquarie consortium, including design and build contractor Brookfield Multiplex and facilities management provider Bouygues E&S, was selected preferred bidder over two UK and European construction companies in March 2014. Macquarie, as financial advisor, approached over 35 funders including commercial banks, private and institutional investors and multilaterals with two or three different financing structures. Of the funders, 60 percent were banks and 40 percent were institutional investors, by value of the debt provided, with Prudential through its asset management arm M&G providing the lowest-cost financing. 

The greatest risk, which is that the building doesn’t get completed, is passed down to the contractor. Post-completion, the only peculiarity of this operation in terms of risk is the payment mechanism under the concessionaire, Jacobs explains. The NHS as tenant and concessionaire will have to pay rent on the hospital. “There is a rent but it is not a guaranteed rent. The risk depends on the quality of services provided by the facility, rather than the facility just being there and being rented.”

PPP continues to have its naysayers, its image tarnished by the private sector making excessive profits off taxpayers. There will always be questions about whether projects can be financed more cheaply by governments, and whether debt is the right route. As Jacobs and other sources highlight, excess liquidity can lead to blurred credit judgement. And a recent report by Audit Scotland claims that council borrowing, with £2.7 billion in PPP deals alone, requires better reporting and scrutiny.

The latest incarnation of NPD may help improve PPP’s reputation, however. An adoption of the model is expected in Wales by the end of the year, according to sources. With tax benefits linked to the use of debt in PPP projects and interest rates low, the cost of capital is weighted in favour of debt and fixed-income type returns over inflation-linked right now.