1 Infrastructure Newsletter October 2013 ....>..Canada 5 Year Yield 1.73% ………>..Canada 10 Year Yield 2.42% ………>..Canada 30 Year Yield 3.03% ………>.. In September, the Canadian market welcomed pleasant news in the form of successful new Project Finance issues. Unfortunately October ushered in negative news by way of credit rating events… That being said, the negative news was offset by yet another PPP project successfully reaching substantial completion on time and on budget. On October 8 th , the Province of Quebec announced that the team of Accès Recherche Montreal (Fiera Axium, Meridiam, Pomerleau and Verreault) achieved this feat for the CHUM Research Centre (“CRCHUM”) project. The bonds associated to the $470M project were issued in May 2010 and amounted to $334M. Over and above strictly reaching substantial completion, the project is interesting as it demonstrates that even smaller, more local, contractors can successfully win and deliver large scale PPP projects. Discussing Spreads – Construction Risk Premium This section builds upon the discussion most recently presented in our August 2013 edition. Every time a project reaches substantial completion we hope to be able to extract the exact spread attributable to construction risk. With CRCHUM having reached that point, we yet again attempt to answer this question. Unfortunately, the answer continues to be elusive. The indexes in the following graph use the same logic as our traditional PPP index yet separates the bonds into two pools; those that have achieved substantial completion (blue line) and those that have yet to achieve substantial completion (red line). Bonds are moved to the ‘post’ pool once substantial completion is achieved (their historic spreads remain in the ‘pre’ pool) hence the volatility in the blue line. With 5 bonds now in the ‘post’ index we anticipate that volatility will diminish. In the opening paragraph of this section, we mention that the answer remains elusive. This is because the data is currently not supportive, in the sense that the ‘post’ pool is 11bps wider than the ‘pre’ pool which is clearly not what we would expect. The answer however lies in the individual components. Post Substantial Completion Pre Substantial Completion Name Current Weight Name Current Weight Northwest Anthony Henday Drive 22% St Joseph Hamilton 8% Bridgepoint Hospital 21% CSEC 26% RCMP E Division 15% St. Joseph’s Health Care 7% CR CHUM 27% Halton Health Care 17% Forensics 16% Humber River Hospital 12% North East Anthony Henday 17% 407 East Extension 4% Alberta Schools Phase III (ASAP) 3% Restigouche Hospital 2% Iqaluit Airport 4% As explained on page 6, SNC Innisfree McGill bond qualified for index inclusion from July 9, 2010 to October 17, 2013 170 180 190 200 210 220 11/1/2011 12/1/2011 1/1/2012 2/1/2012 3/1/2012 4/1/2012 5/1/2012 6/1/2012 7/1/2012 8/1/2012 9/1/2012 10/1/2012 11/1/2012 12/1/2012 1/1/2013 2/1/2013 3/1/2013 4/1/2013 5/1/2013 6/1/2013 7/1/2013 8/1/2013 9/1/2013 10/1/2013 Post Substantial Completion Pre Substantial Completion
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1
Infrastructure Newsletter October 2013
....>..Canada 5 Year Yield 1.73% ………>..Canada 10 Year Yield 2.42% ………>..Canada 30 Year Yield 3.03% ………>..
In September, the Canadian market welcomed pleasant news in the form of successful new Project
Finance issues. Unfortunately October ushered in negative news by way of credit rating events… That
being said, the negative news was offset by yet another PPP project successfully reaching substantial
completion on time and on budget. On October 8th, the Province of Quebec announced that the team of
Accès Recherche Montreal (Fiera Axium, Meridiam, Pomerleau and Verreault) achieved this feat for the
CHUM Research Centre (“CRCHUM”) project. The bonds associated to the $470M project were issued
in May 2010 and amounted to $334M. Over and above strictly reaching substantial completion, the
project is interesting as it demonstrates that even smaller, more local, contractors can successfully win
and deliver large scale PPP projects.
Discussing Spreads – Construction Risk Premium
This section builds upon the discussion most recently presented in our August 2013 edition. Every time a
project reaches substantial completion we hope to be able to extract the exact spread attributable to
construction risk. With CRCHUM having reached that point, we yet again attempt to answer this
question. Unfortunately, the answer continues to be elusive. The indexes in the following graph use the
same logic as our traditional PPP index yet separates the bonds into two pools; those that have achieved
substantial completion (blue line) and those that have yet to achieve substantial completion (red line).
Bonds are moved to the ‘post’ pool once substantial completion is achieved (their historic spreads remain
in the ‘pre’ pool) hence the volatility in the blue line. With 5 bonds now in the ‘post’ index we anticipate
that volatility will diminish.
In the opening paragraph of this section, we mention that the answer remains elusive. This is because the
data is currently not supportive, in the sense that the ‘post’ pool is 11bps wider than the ‘pre’ pool which
is clearly not what we would expect. The answer however lies in the individual components.
Post Substantial Completion Pre Substantial Completion
Name Current Weight Name Current Weight
Northwest Anthony Henday Drive 22% St Joseph Hamilton 8% Bridgepoint Hospital 21% CSEC 26%
RCMP E Division 15% St. Joseph’s Health Care 7% CR CHUM 27% Halton Health Care 17%
Forensics 16% Humber River Hospital 12%
North East Anthony Henday 17% 407 East Extension 4%
Alberta Schools Phase III (ASAP) 3%
Restigouche Hospital 2% Iqaluit Airport 4%
As explained on page 6, SNC Innisfree McGill bond qualified for
index inclusion from July 9, 2010 to October 17, 2013
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3Post Substantial Completion Pre Substantial Completion
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Infrastructure Newsletter October 2013
....>..Canada 5 Year Yield 1.73% ………>..Canada 10 Year Yield 2.42% ………>..Canada 30 Year Yield 3.03% ………>..
The graph below sheds some light as to why a current comparison between the ‘post’ pool and the ‘pre’
pool may be flawed. In the graph below we compare the simple average of three ‘post’ bonds (RCMP /
CRCHUM / Forensic – blue line), the ‘pre’ federal ‘A’ rated project CSEC (red line) and our PPP Index
(green line).
The three identified bonds in the ‘post’ pool have always been chronically wider than the index itself for
various reasons; non PC Bond eligibility, security package, nature of parties…. They collectively
represent 58% of the ‘post’ pool. CSEC on the other hand has always been tighter than the broad index
due to its federal status and ‘A’ rating and it represents 26% of the ‘pre’ pool (if we remove CSEC from
the pool, the ‘pre’ level rises by 4bps). As more projects reach substantial completion, whose bonds
coincidently are those that are more broadly held, the value of the ‘post’ index will grow and a better
assessment of the construction risk premium should start to emerge.
Discussing Spreads – The Effect of a Downgrade The October 2012 edition of our newsletter featured a section entitled “The Effect of Panic” which
profiled the events surrounding the MUHC PPP. One year later, this edition unfortunately has to yet again
table the discussion. Consider the following rating related events that occurred over the past year:
1. November 5, 2012: S&P changes the outlook on the ‘A-‘ rated MUHC PPP bond from ‘stable’ to
‘negative’
2. August 28, 2013: DBRS changes trend on the ‘A (low)’ rated MUHC PPP bond from ‘stable’ to
‘negative’
3. October 17, 2013: DBRS downgrades the MUHC PPP from ‘A (low)’ to ‘BBB (high)’ and maintains
the negative trend.
In all cases, these actions arose largely due to similar actions taken on the project’s joint equity owner and
design build contractor SNC-Lavalin. The following graph shows the daily change in spreads on the
MUHC bonds over the past year (we have specifically identified the three aforementioned events).
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Infrastructure Newsletter October 2013
....>..Canada 5 Year Yield 1.73% ………>..Canada 10 Year Yield 2.42% ………>..Canada 30 Year Yield 3.03% ………>..
In the above graph we can see that the market reacted quickly to the action taken by the agency and in
each case resulted in a widening of approximately 5bps the following day. In the following graph we plot
the spread of the MUHC PPP bonds over the past year (we should mention that through the volatility, the
spread is currently essentially at its starting point for the period in question).
The graph shows that the widening attributed to the S&P action in November 2012 quickly vanished
whereas recent DBRS actions have led to a widening that has persisted. In total, the change from ‘A (low)
– stable trend’ to ‘BBB (high) – negative trend’ caused a widening of 11bps. In our view this
underestimates the true spread differential between an ‘A-‘ and a ‘BBB+’ credit. The argument can
however be made that the downgrade was already priced in.
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Infrastructure Newsletter October 2013
....>..Canada 5 Year Yield 1.73% ………>..Canada 10 Year Yield 2.42% ………>..Canada 30 Year Yield 3.03% ………>..
To that point, in the following graph we compare the spread for MUHC (blue line) and our PPP bond
index (red line).
We can see that the two data sets diverge as of Q3 2012. The average spread difference from the first
S&P action on November 5th 2012 to October 21
st 2013 has been 28bps which is what we would expect
the difference between the two specified credit rating notches to be (this would be slightly wider if we
were to extract MUHC from the PPP index).
It should be noted that the outlook on other DBRS rated SNC related PPP projects (407 Extension and
Restigouche Hospital) have been changed from ‘stable’ to ‘negative’.
Other Financing News The renewable power sector continues to finance itself through other means than the rated bond solution.
1. Domestic & International Bank Solution: Samsung Renewable Energy and Pattern Energy
successfully financed their 150MW wind project in Ontario. The $400M facility brought together as
many as 10 domestic and international banks.
Comparable Bond Issues Spreads on corporate comparables are an important factor in determining the spread of project finance
product for three reasons.
1. First, they become the starting point for many investors looking to invest who then add for specific
realities such as construction risk premium, illiquidity premium…
2. Second, dealers often use these securities in the spread refresh mechanisms that they use at the time
of bidding.
3. Third, a number of investors in the sector manage project finance related bonds in the same book as
‘infrastructure’ corporates. As such, these corporates often become the ‘out trades’ at the time of a
new issue. ‘Out trades’ being those bonds that are sold to make room for a new issue within a
portfolio. The level of the ‘out trade’ product can have a direct impact on the success of a new issue.
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Infrastructure Newsletter October 2013
....>..Canada 5 Year Yield 1.73% ………>..Canada 10 Year Yield 2.42% ………>..Canada 30 Year Yield 3.03% ………>..
Spy Hill Natural Gas Peaking 173.45 Canada 2029 01/16/2013 180.5
Comber Wind 272.52 Canada 2023 02/19/2013 301.4
North Battelford Natural Gas Baseload 203.02 Canada 2023 09/20/2013 205.0
As per PC Bond dated October 21st 2013
* versus curve
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Infrastructure Newsletter October 2013
....>..Canada 5 Year Yield 1.73% ………>..Canada 10 Year Yield 2.42% ………>..Canada 30 Year Yield 3.03% ………>..
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