Monday 21 March 2016 by Company updates

A recap on Royal Women's Hospital refinancing risk


We revisit the refinancing risk around the Royal Women’s Hospital nominal bond, and present a case for why we continue to see a refinancing of the bonds as a likely outcome


It is important to note the Royal Women’s Hospital (RWH) bond documents refer to the 2017 date as a ‘scheduled maturity date’ not a ‘call date’. This is very different to the optional redemption (call) provisions we see on a number of other bonds. The regular call provisions provide an opportunity for an issuer to redeem the bond early but there are no adverse consequences for the issuer if the early call isn’t invoked. However, if RWH did not mature its bonds on the scheduled date there would be far more adverse consequences, which are outlined below.

What is the refinancing risk?

The nominal bonds require refinancing in 2017. RWH is contracted into a full term concession agreement with the Victorian Government. In return for constructing and operating the hospital over the full concession period, RWH receives a set of ‘annuity like’ payments to service debt and provide an equity return, as well as operating costs.

The amount of government payments were effectively locked in at financial close in 2005 and were sized at a time when financial structures for PPP projects were very aggressive (‘pre GFC’). These government payments were set using assumptions around assumed credit spreads for future debt refinancing and gearing levels which would not be achievable in today’s infrastructure financing market. As a result of what is now considered excessive financial leverage, there is a likely to be a funding hole in 2017. As the amount of new debt which can be raised is less than, the amount of debt (and potentially swaps) needing to be refinanced. A likely solution in 2017 would be to fill the funding gap with an injection of new equity capital from the owners.

In addition, there is a complex forward starting swap in place between RWH and ANZ/Macquarie which hedges interest rate exposure on the nominal debt component until the end of the concession.

Case for likely in refinancing in 2017

  • RWH is one of the more mature PPPs in Australia, with operations commencing in 2008. Operational performance has been solid and this is expected to continue for the remainder of the concession. For the owner of the business, RWH represents attractive, long term exposure to a mature operating Australian PPP which is difficult to replicate
  • RWH is owned by Bilfinger Berger Group Investments (BBGI), which is a closed end infrastructure investment company listed on the London Stock Exchange with a geographically diversified portfolio of 39 high quality availability-based PPP/PFI infrastructure assets. Net asset value was GBP470m as at 30 June 2015 and further acquisitions have been made since then
  • The company has only two assets in Australia (RWH and Northern Territory Prisons) and so RWH represents an important exposure for the fund to the relatively high quality Australian PPP market
  • We believe the fund has sufficient resources to fund a capital injection and recently announced an improvement in their liquidity. In January 2015, BBGI secured a new three year revolving credit facility of GBP80m from ING Bank and KfW IPEX-Bank. BBGI retains the flexibility to consider larger transactions by virtue of having structured a further GBP100m incremental accordion tranche
  • If BBGI does not call the bonds in 2017 and refinance, there is a further 4 years before the bonds reach a final maturity date. However, we note that between 2017 and 2021:
    •  a) dividends are locked up and are available to pay down debt and;
    •  b) the owners ability to control the refinancing task effectively diminishes. To the owner, not calling at 2017 is could lead to a full erosion of its equity investment and the chances of equity recovery fall away the longer the refinancing is delayed.
  • The concession runs until 2031. So the fund is potentially giving up 15 years of future equity returns by not refinancing in 2017
  • In its most recent interim report, BBGI stated that “management will actively seek to refinance where it believes it can result in a project value uplift”. Injecting capital to facilitate a refinancing in 2017 would appear to be an active method by which BBGI preserves its future equity value in RWH
  • There are reputational issues for BBGI if they walk away from the asset – it would make participation in future deals in the Australian market very challenging because these transactions are ‘partnerships’ with government parties. It is important to governments that these assets appear stable and don’t default
  • Half of the RWH debt is in the full term IAB, making the refinancing task more manageable (the project company only needs to worry about half of its debt)

Risks around refinancing not occurring

  • The major risk to RWH is a blow out in credit spreads, or a pullback of liquidity from the bank market which would make refinancing prohibitively expensive for RWH. This could occur, for example, if we had another major credit event between now and 2017. We would need to revisit our assumptions around the likelihood of refinancing if a blow out in credit spreads were to occur
  • There is a complex forward starting swap in place between RWH and ANZ/Macquarie which hedges interest rate exposure on the nominal debt component until the end of the concession. ANZ/Macquarie have rights to terminate this swap at 2017 and if they do exercise this right:
    • a) RWH will need to also fund a mark to market payout on the swap on top of refinancing the nominal bonds and;
    • b) RWH will need to re-enter into a new interest rate swap to hedge interest rate risk (although we note this will likely be executed at a much lower swap rate than 2005 levels when the swap was first struck). This factor is complicating to the refinancing task but not unmanageable.


We continue to be confident that the RWH nominal bonds will be refinanced at the scheduled maturity date in 2017. While the risks cannot be ignored we believe that there is a sufficient combination of factors to support confidence that the refinancing will take place in 2017. These are summarised below:

  • The operational quality of the asset and the relative absence of high quality infrastructure assets versus an abundance of fund appetite to buy these assets
  • The strong incentives for the owner to inject capital to support a refinancing, and the financial capacity of the owner to inject equity capital
  • Strong bank appetite for infrastructure like assets, which has led to a progressive tightening of credit spreads since the GFC, which will go some way towards filling the funding hole in 2017. However, we probably won’t see credit spreads and gearing for these assets ever going back to the pre GFC levels

We see the asset as continuing to perform strongly over the remainder of the concession, and would be attractive for an incoming infrastructure if a financial default were to occur. Moody’s has described the refinancing task as ‘manageable’ and we agree with this position. Our view would change if we were to see a sharp widening of credit spreads and/or a pullback of liquidity from the bank market. At this stage we don’t see either of those as evident in the current marketplace.