TEXT-S&P summary: Healthcare Support (North Staffs) Finance PLC

Sept 20 -

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Summary analysis -- Healthcare Support (North Staffs) Finance PLC - 20-Sep-2012

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CREDIT RATING: None. Please see issue list. Country: United Kingdom

Primary SIC: Special Purpose

Program

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Rationale

The 'BBB-' long-term senior secured issue rating reflects a composite of credit factors that are outlined below.

The bonds and the EIB loan retain an unconditional and irrevocable guarantee provided by MBIA U.K. Insurance Ltd. (MBIA; not rated) of payment of scheduled interest and principal. Under Standard & Poor's Ratings Services' criteria, a rating on a monoline-insured debt issue reflects the higher of the rating on the monoline and Standard & Poor's underlying rating (SPUR). The long-term debt rating on the bonds currently reflects the SPUR.

The underlying 'BBB-' debt rating takes into account the following principal project risks:

-- The project is exposed to facilities management (FM) services (both hard and soft) from Sodexo Healthcare Ltd. throughout the concession period. We understand that Sodexo has recently experienced difficulties in the delivery of its soft FM services, notably portering and domestic cleaning. As a result, the Trust issued Sodexo with a warning notice in April 2012. Although we believe that Sodexo's services have since improved, we understand that the Trust is not yet fully satisfied. In our view, this could undermine the relationship between the parties.

-- The project is exposed to the uncertainty of more than 32 years of capital-replacement costs, although, positively, this is only in relation to new-build facilities.

-- The project has an aggressive financial structure, although this is typical of U.K. PFI projects. The ratio of senior debt to total funds is 88.1% (excluding receipts from the Trust), and the base-case annual senior debt-service coverage ratio (DSCR) is 1.20x minimum and 1.22x on average. When calculated in accordance with our criteria, which excludes interest income, the minimum DSCR falls to 1.17x and the average to 1.19x. Positively, the financial structure is robust under a range of construction and operational stress scenarios.

These risks are offset by the following credit strengths:

-- The successful and timely completion of the construction and handover in June 2012, which triggered the step up in unitary payments to 100%. Despite the ProjectCo's requirements to correct construction defects, it now has limited exposure to the construction contractor. Only external landscaping and car parking (to which no unitary payment is attached) are yet to be completed, by August 2014.

-- The revenue stream is based on availability, with no volume or market exposure, negligible reliance on third-party revenues, and a payment mechanism that the lenders' technical adviser (TA; Currie & Brown) regards as consistent with similar projects. The credit quality of the ProjectCo's main revenue source, the Trust, does not constrain the underlying rating on the project.

-- In addition, the project rationale is strong and supported by the likelihood of high long-term demand for health care services in the local area.

Liquidity

The project benefits from a six-month forward-looking senior debt reserve account, a lifecycle reserve account structured on a three-year, forward-looking basis (accruing 100% lifecycle expenditures for the first year, 66% for the second, and 33% for the third), a change in law reserve covering 83% of ProjectCo maximum liabilities, and a cash retention of 3%.

Outlook

The positive outlook reflects our view that the recent difficulties caused by the FM services have not undermined the relationship between the Trust and other parties. The outlook also reflects our expectation that reported construction defects would be resolved without any financial impact on the ProjectCo.

We could raise our issue rating if FM services, particularly soft FM, improve to a satisfactory level, and if the projected financial performance of the project remains at least consistent with our current forecasts.

We could revise the outlook to stable or take negative rating action if the soft FM services do not improve, possibly leading to a deterioration in ProjectCo's working relationship with the Trust and other parties. We could also consider negative action if we see the project's financial profile weaken materially.

Related Criteria And Research

All articles listed below are available on RatingsDirect on the Global Credit Portal, unless otherwise stated.

-- Updated Project Finance Summary Debt Rating Criteria, Sept. 18, 2007

-- Project Finance Construction And Operations Counterparty Methodology, Dec. 21, 2011