Beyond sovereign

Flanked by a group of European, Canadian, American and Turkish investors at his presidential complex in Ankara last year for the signing ceremony for two hospitals, Turkey’s President Recep Tayyip Erdogan declared he wanted to make the country among the top five destinations in the world for medical tourism. This, the outspoken President promised, would be fuelled by the building of 29 city hospitals holding 41,000 beds at a cost of 30 billion liras ($8.2 billion; €7.7 billion) and all by 2019.

A few weeks after the ceremony, Turkey inched a €360 million step closer, after French fund manager Meridiam reached financial close on the Elazig Integrated Health Campus PPP project, a 1,038-bed hospital. Financed via a €288 million ‘green’ bond issued by Meridiam and its local partner, Ronesans Holding, the Elazig project could represent a blueprint to fulfilling President Erdogan’s healthcare ambitions.

While project bonds in the infrastructure space are hardly a novelty, this issuance represented Turkey’s first greenfield infrastructure project bond. It was subscribed to by a group of investors including Proparco, the International Finance Corporation and Siemens. The Industrial and Commercial Bank of China and Mitsubishi UFJ were also among the subscribers.

Yet where the bond really stands out is in the finer details. Benefitting from a political risk guarantee from the World Bank’s Multilateral Investment Guarantee Agency, it is supported by subordinated liquidity facilities developed by the EBRD in a first-of-its-kind combination. The 20-year bonds have been rated Baa2 by Moody’s, two notches above Turkey’s sovereign rating. They also benefit from a deferred draw feature, allowing Meridiam and Ronesans to gradually draw down the funds during Elazig’s construction phase and reduce the cost of interest.

FILLING IN THE GAPS

The idea for the credit enhancement scheme, the EBRD explains, is to encourage new long-term viable sources of infrastructure finance amid a continuing fall in conventional banking finance.

“The banks’ balance sheets are becoming more limited day by day,” says Asli Erden Ozturk, principal banker at the EBRD and a senior banker on the Elazig deal. “With this in mind, we had been thinking alongside Meridiam about how we can bring in institutional investors – or different investors to banks – to infrastructure.”

The answer, it seems, rested in creating something for everyone. The issuers, Meridiam and Ronesans, released the bond in three tranches of 18 and 20 years, tenors uncommon in the Turkish market and which helped attract the diversified group of subscribers. While the first two tranches – of €83 million and €125 million respectively – were credit enhanced by the EBRD, the IFC invested €80 million in the unenhanced tranche. Social and governance rating company Vigeo also certified the bond as “green and social” as a result of the climate-friendly technologies to be installed at the hospital for electricity and heating purposes.

“We've done more of the classic financing for hospital PPPs through syndicated loans and now we’re moving into much more sophisticated instruments,” Ozturk explains. “The idea is to bring non-conventional investors into PPPs which haven't invested in that market before. We are moving into credit enhancement as a more innovative tool to attract investors.”

However, as Ozturk lays out, the joint credit enhancement product does not work without MIGA’s political risk guarantee, which protects the bond issuers and sponsors from currency and arbitration risks. The first-time credit improvement scheme has been jointly developed by the two bodies and the combination, earning the Baa2 Moody’s rating, provided confidence and visibility to the capital markets to finance the project.

SHREDDED TURKEY

In evaluating its rating, Moody's vice-president and senior analyst Christopher Bredholt said the two forms of credit enhancement reduced lender exposure to what he described as “risks emanating from the sovereign environment”, an allusion to the instability generated in the Turkish market after a failed coup in July last year. The botched attempt by rebel army factions to dislodge President Erdogan’s government resulted in the deaths of hundreds of rebels, pro-government forces and civilians. 

Erdogan, however, came under fire for his government’s response after tens of thousands of public sector workers across the judiciary, police and civil service were detained, while over 4,000 private companies were shut down, with their assets seized or transferred to the government, according to the EU. What was regarded as a promising market was generating severe instability and Ozturk admits the EBRD had its worries over its role in the Elazig project.
“In Turkey, we had a couple of challenges in the last year and each time we wondered whether the project would get the rating,” she says euphemistically. “Thanks to an innovative, solid structure, the project was awarded a rating that is two marks above the country rating.

Moody’s eventual Baa2 rating for Elazig Hospital was thus particularly important as it arrived two months after the agency downgraded Turkey's sovereign credit rating to Ba1, stripping the country of its investment-grade certification. “In order to bring the non-conventional investors to a deal, the prerequisite is to get the investment grade,” Ozturk says.

THE NEW NORMAL?

A common conclusion coming from those involved in Elazig and the bond in the aftermath of the deal is that the credit enhancement model used by the EBRD and MIGA is one that could act as pathfinder for future projects, bringing an alternative source of funding to the market. Indeed, when revealing the deal to Infrastructure Investor in November, Meridiam chairman Thierry Déau argued it would be useful for other countries rated below investment grade and would attract investors who otherwise would not buy into such a project.

“We are talking about both in Turkey and outside,” Ozturks adds. “The aim is when we have the right project we obviously would like to replicate it. Balance sheets are limited and we need to bring in other sources if we are to finance huge infrastructure projects. From the EBRD's side, we need to have the right projects and project agreements in place. 

“This particular example is a great fit because it is not a huge project but mid-sized. Going forward, people can follow this product to finance their projects and they can bring in not only banks but also different investor profiles in Turkey and elsewhere.”

The Elazig hospital achieved so many landmarks during the financing process that it has already broken down several barriers for future projects looking to replicate the funding structure. That it trumped the political instability that engulfed Turkey during the preparation stages of the deal will only add to the confidence that the new product is a viable form of funding.