Hospital construction is an important area of infrastructure finance. But within that, the role of banks has been changing. John Ollett reports.
In 2009, the British government announced that the National Health Service could not offer certain medicines for the treatment of cancer because they were prohibitively expensive. This provoked a public outcry but served to drive home the fact, stated in a recent World Health Organisation report, that “no country, no matter how rich, is able to provide its entire population with every technology or intervention that may improve health or prolong life”.
This difficulty in meeting universal demand for good health means that the medical sector must constantly upgrade and improve itself. One of the key areas of development is hospital construction – an enormous industry.
In addition to new hospitals, there is also significant demand for the renovation and upgrade of existing facilities, particularly in the western world. The US alone has up to US$25bn worth of hospitals under construction at any one time.
With solid underlying demand, hospitals are an important subset of infrastructure financing. A large proportion of this financing is traditionally provided by the government but, in recent years, the private sector has been taking a bigger role.
“There is demand for infrastructure assets, they continue to perform despite economic cycles and they have a consistent performance,” Victoria Whitehead, director, infrastructure and energy finance at Lloyds explains to GTR.
Nevertheless, government bodies, development finance institutions (DFIs) and multilaterals still account for a large portion of hospital financings. In June last year, KfW provided a grant of €8.5mn to finance the expansion of CCBRT Hospital in Dar es Salaam while, the following month, the IFC arranged a US$37mn hospital financing and construction in Nigeria with the government providing the lion’s share of the funding.
Return from the crisis
The hospital sector was not immune to the fall in bank lending during the financial crisis when a number of international lenders – particularly European banks – retreated to their domestic markets.
Many of these banks adopted the view that long-term financing was far less attractive than it had been, due in part to the economic situation and to new regulations that impacted the return on long-term loans.
But the withdrawal of a number of international lenders has not changed the profitability of the sector and a number of deals have been completed using local banks, with participation from those international banks still operating in the market.
Last year, a consortium agreed to provide a syndicated loan to the tune of EGP1.5bn (around US$220mn) to finance the construction of the Alexandria University Hospital. The lenders included National Bank of Egypt, Ahli United Bank, HSBC and Commercial International Bank.
Furthermore, UniCredit is attempting to close the first ever hospital financing in Turkey using a version of the British PFI model, Peter Aurich, the bank’s head of infrastructure, Turkey tells GTR.
The parties in the transaction are still in the process of sorting out final issues in the project agreement schedules but funding has already been secured from a variety of international investors including UK and international banks as well as DFIs.
Bridging the gap
The social infrastructure market has also seen a marked increase in the number of institutional investors.
“We have seen a plethora of institutional investors come into the space, focusing on infrastructure and all trying to step into the perceived gap in the market where the banks used to operate,” says Whitehead at Lloyds.
The CEO of institutional investor Legal and General recently reiterated his commitment to infrastructure in the UK national press.
Gabriel Buck, head of ECA and capex financing solutions group at Barclays, tells GTR: “Institutional investors are attracted to infrastructure, given that they have long-dated liabilities and are looking for assets that can match that. They have got a depth of liquidity that is somewhat advantageous, which I think is useful to tap for these types of projects.”
This can be seen in the recent Royal Liverpool University Hospital financing in the UK, where the main private financiers were Legal and General and Scottish Widows Investment, with Lloyds being the only bank involved.
This transaction, as is typical in hospital transactions, also had significant participation from governments and multilaterals, which provided £90.5mn, with the Royal Liverpool and Broadgreen University Hospitals Trust providing £118m of the £429mn total.
The most important difference institutional investors are making on the market is on pricing. Whitehead says: “Senior lenders that are still active in the long-term social infrastructure space have demonstrated themselves to be quite resilient in terms of offering increasingly competitive pricing, trying to defend their market from the institutional investors. In the last year and a half we’ve seen a lot of pressure on pricing.”
This is being driven in part by a weak project pipeline globally. During 2012 in particular, many organisations were hesitant to commit to new projects. This was particularly true in the US, one of the largest markets for hospital financing, which lingered under the threat of reform of its medical industry.
US medical organisations anticipated spending more on facility renovations than new construction in 2012 for a second straight year, a survey by Health Facilities Management indicates.
Continuing role as MLAs
With increasingly competitive pricing, the optimal role for banks may be as arranger on transactions rather than simply as a financier.
Buck says: “You will not have, in my opinion, institutional investors doing the structuring and execution of the facilities. They will come in on an existing facility that has been packaged by a bank and take the lending and funding risk on a transaction that has been put together.
“What institutional investors don’t have is the ability to structure the facilities in the first instance, so there is a symbiotic relationship between the banks who have to package these transactions and the institutional investors that are interested in purchasing and funding the underlying transaction.”
This can be seen in a number of facilities, including the recent New Royal Adelaide Hospital financing in Australia, on which Lloyds acted as one of the lead arrangers, and provided a portion of funding, while InfraRed (the former equity arm of HSBC), Leighton Infrastructure Investments, John Laing Investments, Uberior Infrastructure (Lloyds Bank’s equity investment division) and the Macquarie Group provided the majority of the funding.