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"Typically, rental payments from healthcare properties are more operations dependent than in standard CMBS. Thus, we treat this transaction as a whole-business securitization" Guillaume Langellier, Fitch Ratings |
The hospitals backing GHG healthcare’s Theatre (Hospitals) transaction, which was launched last month, should be pretty familiar to the ABS market by now; this is the third time they have been securitized. The first deal was subsequently refinanced (and then withdrawn) to be replaced by this latest structure, the product of South African healthcare group Netcare’s acquisition of GHG in April 2006 for £2.2 billion ($4.4 billion). As soon as the buyout became public, an opco/propco refinancing was on the cards – not least because the leverage in the GHG Finance deal was comparatively low and because London & Regional Properties was a member of the winning consortium (along with Apax Partners and Brockton Capital). The deal that has eventually emerged is indeed based on opco/propco principles, but has been a long time coming and involves a puzzlingly complex structure.
Even the most cursory glance at the deal raises questions – not least why it has two issuers (which are identical from a structural standpoint) plus an additional group of senior lenders – which means that the borrower is repaying loans to three different groups of senior lenders. The two issuers are called Theatre (Hospitals) No 1 and 2 and are issuing £396 million and £264 million. There is £300 million of senior bank debt outside the structure but ranking pari passu with the securitization. A £515 million mezzanine loan and a £175 million junior loan complete the structure.
The deal is being arranged by Barclays Capital, which remained tight-lipped about the reasons for the form of the transaction in late April. The explanation given to the market was that the dual issuer structure was being used for accounting reasons. "It does seem a bit bizarre," says a CMBS expert. "I think having the dual issuer structure in this deal is transaction-oriented; we won’t see it again," comments Michela Bariletti, analyst at Standard & Poor’s. "The dual issuer vehicles complicate the overall structure without adding any benefit from a credit perspective." With three separate entities at the senior level, the success of the structure will depend on having watertight intercreditor agreements between them.
Unusual
The second aspect of the deal that immediately catches the eye is that Barclays Capital is retaining all of the triple-A notes in both vehicles (which amounts to £385 million) along with the double-A tranche of Theatre (Hospitals) No 1 (£57 million). This means that just £38 million double-A, £90 million single-A and £90 million triple-B notes are being offered to the market. This is very unusual and there is no official explanation as to why the bank is taking this step – these are not the kind of assets that would be suitable to be ramped and put into, for example, a CRE CDO. But several sources in the market have suggested that the pricing achieved in the Starling (Supermarkets) transaction last December could have had a bearing on the decision to retain this deal.
As a corporate securitization/CMBS hybrid, Theatre (Hospitals) is one of a select few such transactions in the market. Starling (Supermarkets), the £805 million securitization of various property assets for UK supermarket group Somerfield last year, set the tone for investor appetite for these types of deals at the triple-A level. Original guidance on the 6.52 year triple-As in that deal was 25 to 28 basis points, but the notes only cleared at 32bp. "There is a suspicion that when the arrangers saw the level at which the Somerfield notes cleared they decided to have another look at the GHG structure," suggests one observer. Indeed, it is rumoured that the GHG deal was due to be launched at the end of last year but might have been delayed for a rethink.
Clearly a supermarket deal is not a perfect comparison for a private hospital deal but both involve a single tenant and exposure to operational risk – and thus present the same concerns to investors. The most obvious comparisons for Theatre (Hospitals) are the Priory deal (Talisman Finance 2) and the Barchester deal (EPIC Barchester), both of which involve private hospital assets and are opco/propco refinancings of former whole-business securitizations. The original Priory whole business securitization took place in 2003, a £207 million deal arranged by RBS for then-owner Doughty Hanson. This deal was redeemed in 2006 after ABN Amro acquired the Priory for an eyewatering £875 million. The Priory assets reappeared in the ABS market at the end of 2005 as part of Talisman Finance 2, the second deal out of ABN Amro’s CMBS conduit. The triple-As in this deal priced at 35bp for seven years. The Barchester Healthcare assets first appeared in the securitization market as Westminster Healthcare Finance, an early whole-business transaction that was redeemed in 2006. The £572 million refinancing of the deal was again launched as a conduit CMBS opco/propco structure, this time via RBS’s EPIC CMBS conduit. The triple-A notes in EPIC Barchester came at 28bp for 6.7 years.
First of its type
The GHG portfolio of hospital assets was originally securitized in 2001 – the first ever securitization of private hospital assets. That whole-business securitization was also put in place to refinance an acquisition bridge loan – this time by venture capital house BC Partners. BC had acquired the business from Cinven for £1.29 billion. More than half of the £975 million bonds issued were wrapped to triple-A by Ambac. This deal was subsequently refinanced in October 2004, with Barclays Capital joining Morgan Stanley (which arranged the original deal) now on the ticket. The £578 million deal refinanced the floating-rate tranches of the original deal and saw pricing at the triple-A (wrapped) level fall from 42bp over Libor in the original transaction to 27bp.