Infrastructure Newsletter

Transcription

1 11/1/ /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/ /1/ /1/ /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/ /1/2013 Infrastructure Newsletter 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 Post Substantial Completion Pre Substantial Completion 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,

2 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) RCMP / CRCHUM / Forensic CSEC Index 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). 2

3 Infrastructure Newsletter 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. 3

4 7/9/2010 9/9/ /9/2010 1/9/2011 3/9/2011 5/9/2011 7/9/2011 9/9/ /9/2011 1/9/2012 3/9/2012 5/9/2012 7/9/2012 9/9/ /9/2012 1/9/2013 3/9/2013 5/9/2013 7/9/2013 9/9/2013 Infrastructure Newsletter To that point, in the following graph we compare the spread for MUHC (blue line) and our PPP bond index (red line) MUHC Index We can see that the two data sets diverge as of Q The average spread difference from the first S&P action on November 5 th 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. 4

5 October 22, 2013 Issuer S&P s / DBRS / Moody s Amount Coupon Maturity Spread over Benchmark British Columbia Ferry Services Inc. A+ / A / - CAD $200M 4.702% Oct. 23, bps over CAN 4.00% 2041 Price guidance had been set at 165bps + / - 2 bps and thus came at its tight. Fills were reported being as low as 10%. Post pricing, bids tightened to 160bps closing the day at 157bps. The issue comes with a Canada Call of 41bps and a call feature at par for the final 6 months. October 2, 2013 Issuer S&P s / DBRS / Moody s Amount Coupon Maturity Spread over Benchmark 407 International Inc. A / A / - CAD $200M 4.68% Oct. 7, bps over CAN 4.00% 2041 Price guidance had been set at 160bps + / - 2 bps and thus came at its tight. Fills were reported as being between 25% and 50% and bonds were placed with over 25 investors. Post pricing, bids were as low as 156bps. The issue comes with a Canada Call of 39.5bps and a call feature at par for the final 6 months. A reader asked us to clarify a statement made in our last edition. Specifically whether we could confirm the potentially term in the following statement with regards to the Lower Mattagami bond issue: in May 2011 the issuer announced that they expected to borrow a total of approximately $1.3bn over the next few years. This new issue therefore potentially marks the last issuance for this company. In a discussion with a rating agency, they explained that the issuer initially announced that they will borrow a total of $1.9bn of which $700M will be through commercial paper ( CP ). To date, the issuer has issued $1.375bn. The rating agency expects that all CP will be rolled into bonds and thus will reach their total of $1.9bn and this is expected by the end of Items to Follow On October 16 th Moody s downgraded major construction firm OHL from Ba2 to Ba3. OHL is a major contractor on the $1.37bn CHUM project. When OHL was placed under review for downgrade in May 2012 the same action was quickly applied to the CHUM project bonds. The conclusion of the review resulted in the outlook on OHL changing to negative while the CHUM was confirmed in October 2012 based on the strength and progress of the project itself. This may be why spreads on CHUM only widened slightly on the most recent action against OHL as investors did not expect the event to affect the project. Lo and behold, on October 27 th Moody s released a confirmation that the CHUM rating would remain unchanged at Baa2 with a stable outlook. 5

6 The Northwest Territories have reportedly reached out to the Federal Finance Minister in order to increase the territory s $800M debt ceiling. This request is said to have stemmed from their desire to fund an expansion of the hydro-electric grid in order to link to mining operations. Fitch released a brief study entitled Global PPP Lessons Learned. Some of the more interesting statements made are: - The larger the project and the greater the technical complexity, the more important it becomes that constructors and operators have the technical and financial wherewithal to bear the risk they are taking ; - A well-structured grantor team and a competent concessionaire are better positioned to respond and minimize the adverse effects to both parties ; and - most governments have a large infrastructure deficit and they see PPPs as a way to facilitate progress. This puts much needed pressure on key decision makers to plan better and hold up their end of the bargain as much as possible. On October 8 th, the Province of Quebec s Health Minister stated that it is out of the question that the Parti Quebecois ( PQ ) government deliver future projects through the PPP model. He stated during the inauguration of the CRCHUM that, although the project may have been delivered on time and on budget, the government must now monitor if the model delivers on its promised advantages and whether or not these advantages surpassed the drawbacks. The Provincial Liberal leader, Philippe Couillard, quickly responded that the government should not outright reject the PPP model. He went on to state that it is not in the interest of the government to completely ignore a potential solution. Amid rumored elections in Quebec, a poll published on October 12 th showed Liberals slightly ahead of the PQ, the current party in power (36% vs. 34% respectively). These numbers are largely unchanged since August (PQ up 2% and Liberals stable). Meanwhile, the CAQ (third party of importance in the current parliament) has lost ground at 17%. An internet based poll conducted on October 20 th placed the Liberals at 38% with the PQ at 34%. Analysts have scaled back probabilities of a December election. PPP Spread Index The Casgrain PPP index provides a broad view of credit spread trends for A range PPP credit. The index now includes fifteen eligible bonds; none of which represent more than 19% of the index. The index currently finds itself at 177bps (this was 181bps when last published). A full description of the methodology used is in the August 4 th 2010 edition, available upon request. It should be noted that spread data for the MUHC PPP as of October 18 th 2013 have been removed from the index as they no longer meet the A range rating requirement. 6

7 Current levels for Casgrain index included bonds are: Name 1 Project Spread Benchmark Current Weights (%) Issue Date NorthwestConnect Northwest Anthony Henday Drive Canada /07/ Plenary Health Bridgepoint Bridgepoint Hospital Canada /11/ Green Timbers RCMP E Division Canada /22/ Access Recherche Montreal CR CHUM Canada /20/ CSS FSCC Forensics Canada /17/ Plenary Health Hamilton St Joseph Hamilton Canada /30/ Plenary Properties LTAP CSEC Canada /25/ ITS SJHC St. Joseph s Health Care Canada /08/2011 Hospital Infrastructure Partners Halton Health Care Canada /26/ Plenary Health Partners Humber Humber River Hospital Canada /20/ Capital City Link Group North East Anthony Henday Canada /08/ East Development Group 407 East Extension Canada /15/ ABC Schools Partnership Alberta Schools Phase III (ASAP) Canada /12/ Rainbow Hospital Partnership Restigouche Hospital Canada /02/2013 Arctic Infrastructure Partnership Iqaluit Airport Canada /09/ As per PC Bond dated October 21 st SNC Innisfree McGill bond qualified for index inclusion from July 9, 2010 to October 17, versus curve Issue Spread 2 Current levels for non-casgrain index included bonds are in the following table. These bonds have been omitted due to structural differences that affect their underlying spread (MUHC = BBB+, CHUM = BBB, Humber = Bullet). Name Project Spread Benchmark Issue Date Issue Spread * SNC Innisfree McGill MUHC Canada /08/ Health Montreal Collective CHUM Canada /07/ Plenary Health Partners Humber Humber River Hospital Canada /20/ As per PC Bond dated October 21 st 2013 * versus curve 7

8 By way of information, we include below the short term PPP related bonds. Name Project Spread Maturity Issue Date Issue Spread * Access Recherche Montreal DBFM - CR CHUM /20/ Health Partners Markham BF Markham Stouffville Hospital --- January /01/ Plenary Health Hamilton DBFM - St Joseph Hamilton --- December /30/ Plenary Properties LTAP DBFM - CSEC August /25/ Plenary Health Partners Humber DBFM - Humber River Hospital May /20/ East Development Group DBFM East Extension December /15/ Rainbow Hospital Partnership Restigouche Hospital --- October /02/ As per PC Bond dated October 21 st 2013 * versus curve It is our thesis that PPP bond investors will become broader project finance investors. As such, we include below power sector project bonds. Name Project Type Spread Benchmark Issue Date Issue Spread * St-Clair Holding Solar Canada /18/ Brookfield Kwagis Run-of-River Hydro Canada /29/ Spy Hill Natural Gas Peaking Canada /16/ Comber Wind Canada /19/ North Battelford Natural Gas Baseload Canada /20/ As per PC Bond dated October 21 st 2013 * versus curve Casgrain Distribution Lists Casgrain provides other mailings via distribution lists that you may want to join. Please inform us should you wish to receive any of the following: Short Term Investments: Casgrain provides a bi-weekly offering which highlights all short term investments that Casgrain can offer (perhaps for your treasury purposes). PPP Indicative Runs: Casgrain now provides weekly indicative credit spread runs to institutional investors for many PPP bonds. New Issue Monitor: On a monthly basis, Casgrain puts forth a document that looks at all corporate bond and preferred share issuance by Canadian entities or in Canadian dollars. Provincial Insider: Casgrain produces a weekly document that looks at current borrowing conditions for the Canadian Provinces. ABCP Mailings: Following the ABCP standstill in August 2007, Casgrain differentiated itself and brought advisory services to numerous clients that held third party ABCP. To date, Casgrain has traded over $1 billion MAV Notes (restructured third party ABCP) in the secondary market. Casgrain provides regular mailings on all ABCP / MAV related news. 8

9 LEGAL NOTICE This was prepared by Casgrain & Company Limited and Casgrain & Company (USA) Limited (collectively "Casgrain") for informational purposes only. Information herein has been obtained from sources believed to be reliable, but Casgrain does not warrant its completeness or accuracy. The value of securities may be adversely affected by changes in market prices, interest rates, exchange rates, and other factors. Prices and availability are subject to change without notice. Information regarding past performances is not indicative of future results. Any products or services mentioned herein are made available only in accordance with local law (including applicable securities laws) and only where they may be lawfully offered for sale. Securities mentioned herein may not be suitable for all investors. The recipient of this information must make its own independent decision regarding any securities mentioned herein. For securities recommended by Casgrain, Casgrain may sell to or buy from customers as principal or agent and may have a long or short position in the securities mentioned herein. To Canadian Residents: Casgrain & Company Limited is a Canadian registered investment dealer and is a member of the Investment Industry Regulatory Organization of Canada and the Canadian Investor Protection Fund. To US Residents: Casgrain & Company (USA) Limited, a wholly-owned subsidiary of Casgrain & Company Limited, is a US registered brokerdealer and is a member of the Financial Industry Regulatory Authority and the Securities Investor Protection Corporation. Version française disponible sur demande 9