The Hexham Hospital buyout example

The Hexham Hospital (Northumbria Healthcare NHS Foundation Trust) was notable for the decision by Northumberland County Council to loan the NHS Trust £114.2m to enable it to buy out its PFI contract. The County Council reduced its ability to borrow for local authority capital needs and took a considerable financial risk. Given the continuing financial crisis imposed on local government by successive government austerity measures, this level of bailout support is unlikely to be repeated, at least in the medium term.

The main costs of the buyout are identified in Table 6 and consists of senior debt repayment - the main bank loan that financed the project (£50.0m), the interest rate swap breakage fee (£27.0m), the market value of equity SPV equity (£14.5m) and the SPV corporation tax liability (£18.2). Taking account of a cash balance of £5.5m and smaller items, such as the £1.0m transaction costs, the total termination fee was £107.2m. However, the final termination fee was £114.2m, which included a £1.3m increase in the market value of the SPV equity.

"The most significant company balance sheet change in 2014 was the receipt of a £15.8m dividend from Hexham General Hospital SPC Holdings Limited in October 2014. This cash was retained in the company pending a decision on whether to use it for purchasing additional shareholdings in PFI project companies or returning it to investors" (Consolidated Investment Holdings Limited (Lend Lease) Annual Report, 2014).

Table 6: Northumbria Healthcare NHS Foundation Trust's estimate of termination fee

Source: Hellowell 2015: extracted from documents prepared by Deloitte on behalf of Northumbria Healthcare NHS Foundation Trust

The Trust had to identify the cost of terminating the PFI contract compared with continuing with the contract. Termination costs comprised the cost of repaying the loan to Northumberland County Council at a fixed interest rate of 3.98% (£180.46m) and the estimated cash cost of operating expenses from October 2014 to the end of the contract in September 2038 (£36.58m) (Hellowell, 2015). The cost of continuing the PFI contract comprised the remaining unitary charges from October 2014 to April 2033 of £222.5m and estimated operating expenses from April 2033 to September 2038 of £8.8m - see Table 7.

The cost saving for the NHS Trust was 6.2% of the cost of continuing the PFI contract.

Table 7: Cost comparison of terminating and continuing the PFI contract

Source: Hellowell 2015: extracted from documents prepared by Deloitte on behalf of Northumbria Healthcare NHS Foundation Trust

For a fuller discussion of buyout and termination issues for NHS Trusts see Hellowell (2015).