Angry in the Great White North

In a previous post, I explored the confidential offering memorandum issued on March 2, designed to raise $214 million via a bond offering to finance the construction of the Durham Courthouse in Oshawa.

I wondered about the secrecy and confidentiality, especially since the bond was paying investors 5.015% interest, compared to an Ontario Savings Bond that pays between 3% and 4% interest. Since the public-private arrangement between the Ontario government and Access Justice Durham (the consortium selected to constructed the courthouse and then operate it for the next 30 years) allowed the consortium to charge the Ontario government the cost of paying out the interest of the bond, a percent or two difference compounded over thirty years on a two-hundred million bond would add up to a significant extra outlay of cash for the Ontario taxpayer.

As it turned out, there was a news report on the Access Justice Durham bond offering on March 6, just four days after it was offered:

The name Access Justice Durham Ltd. can be added to the list of new and unusual borrowers to have raised capital in the domestic market.

The issuer is unusual because, apart from being a special- purpose borrower, it is a private-sector consortium that was awarded a contract by the government of Ontario to "design, build, finance and maintain" the Durham consolidated courthouse, a complex based in downtown Oshawa.

Last Friday it priced a $213.7- million issue of 5.051% thirty-two-and-a-half-year senior secured project amortizing bonds. The bonds were priced at $102.78, which translates into a yield of 4.827%. At that yield, the bonds -- whose average life is about twenty-one-and-a-half years -- were priced 72 basis points above comparable Canada bonds.

Those 72 points is money in the pockets of the investors. That money is coming out of our pockets. The government takes the money out of our pockets, and hands it over to the consortium. The consortium then pays the investors off.

But the cost to Ontario taxpayers is far, far higher than what I've described already:

Indeed, [Moody's analyst Alan McLean] regards the AJD financing as "a template transaction."

So I guess that means that the Ontario government has been repeating this pattern of paying the cost incurred by their private partners to raise money at much higher interest rates than offered by governments when they raise money through bonds for public projects.

If the Sarnia hospital case, the P3 project has gone wildly overbudget. Ironically, the hospital, which was orignally priced at $140 million. was "guaranteed" to cost $214 million, the same amount raised by Access Justice Durham through the bond for the Durham Region courthouse. The Sarnia hospital price tag has now ballooned to $319 million.

I wonder if this "template" is being followed, and the Ontario government is making a deal to pay interest at 70 points or more above the rates paid for a public bond so that the private partner can make up the $180 million shortfall.

If the thought of it causes you to develop an ulcer over the next few years, know that if you live in Sarnia, you'll be able to go to the shiny new hospital for treatment.

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