TEXT-S&P revises Catalyst Healthcare Manchester outlook

(The following statement was released by the rating agency)

Overview
-- Catalyst Healthcare (Manchester) Financing PLC (ProjectCo) has largely
resolved outstanding issues relating to the quality of facilities management
(FM) at the NHS hospitals in Manchester.
-- The improvement in FM has in turn improved the working relationships
between ProjectCo, FM provider Sodexo, and the NHS Trust, with Sodexo and
ProjectCo now more proactive in resolving issues.
-- We are therefore revising the outlook on the senior secured debt
issued by ProjectCo to positive from stable, and affirming our 'BB+' long-term
issue rating on the debt.
-- The positive outlook reflects the potential for an upgrade should the
project maintain the current state of operations, all else being equal.

Rating Action
On Oct. 26, 2012, Standard & Poor's Ratings Services revised its outlook on
the senior secured debt issued by the U.K.-based special-purpose vehicle
Catalyst Healthcare (Manchester) Financing PLC (ProjectCo) to positive from
stable. At the same time, we affirmed our 'BB+' long-term issue rating on the
senior secured debt.

The senior secured debt comprises:
-- GBP218.05 million of senior secured bonds (including GBP38 million in
variation bonds) due in 2040; and
-- A GBP175 million senior secured loan from the European Investment Bank
(EIB; AAA/Negative/A-1+) due in 2037.

The senior secured debt retains an unconditional and irrevocable guarantee
provided by Ambac Assurance U.K. Ltd. (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.

Rationale
The outlook revision reflects our view that ProjectCo has largely resolved
outstanding issues relating to the quality of facilities management (FM) at
the NHS hospitals in Manchester. It also reflects what we see as the positive
evolution over the past year of the working relationship between ProjectCo, FM
provider Sodexo (BBB+/Stable/A-2), and The Central Manchester and Manchester
Children's University Hospitals National Health Service (NHS) Trust (the
Trust).

There now appears to us to be a consensus on most issues, particularly on the
quality of soft FM services that Sodexo provides. This issue had previously
caused friction between the parties, and the Trust had been critical of the
quality of FM provision.

We consider an effective working relationship between the various parties in
project finance transactions as essential because disagreements may result in
performance deductions or the accumulation of service failure points (SFPs),
and possibly impair credit quality.

Although we consider that Sodexo has improved FM provision materially, we need
to see that the improvement is sustainable. In addition, the Trust and
ProjectCo need to regain complete confidence in Sodexo's service delivery.

We impute the improvement in FM to the fact that Sodexo has brought on site a
team of executives with adequate experience to deliver services in line with
the Trust's expectations. Sodexo is now giving the project the level of
attention that it requires. In our view, if Sodexo sustains this standard of
FM, it may eventually enable the project to enter a period of steady
operations that we normally see within 1-2 years of the completion of
construction.

Since the completion of the hospitals' construction in June 2009, ProjectCo
has been providing maintenance and certain nonclinical services under a
38-year project agreement to the Trust under a private-finance initiative
(PFI).

The 'BB+' issue rating reflects the following credit risks:
-- The project's significant exposure to volatility (particularly
short-term volatility) of the retail prices index (RPI). This is because
various elements of the financial structure--including the bonds, EIB debt,
unitary payments, and operational costs--are indexed against RPI, but with
different effective dates.
-- An aggressive financing structure of 90% debt to 11% equity, with 80%
of debt due for repayment over the 10 years prior to debt maturity.
-- Some outstanding issues to resolve, despite the parties' progress over
the past year. Two particular issues are the settlement of deductions that
accrued for construction defects and a possible amendment of the payment
mechanism relating to the calculation of SFPs.

The above weaknesses are offset by the following project strengths:
-- Availability-based revenues over the life of the concession;
-- Strong consortium member companies with investment-grade-rated parents;
-- FM services that are typical for U.K.-based PFI projects and that
benefit from periodic market testing; and
-- The fact that ProjectCo does not retain lifecycle risk.

The minimum and average debt service coverage ratios (DSCRs), excluding
interest income, are 1.15x and 1.24x, respectively.

Liquidity
The project benefits from:
-- A six-month, forward-looking senior debt reserve account;
-- A lifecycle reserve account that is 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); and
-- A change-in-law reserve covering 50% of total liabilities possibly
arising under this circumstance.

Recovery analysis
The recovery rating on the senior secured loan and bonds is '2', indicating
our expectation of substantial (70%-90%) recovery of principal in the event of
a payment default. To date, however, there has been limited experience of
default or loss in this sector, and the value of potential recoveries depends
on many factors relevant at the time of default. In addition, in our
assessment, the discount rate we apply in our analysis has a material impact
on the projected recovery values.

Outlook
The positive outlook reflects the potential for an upgrade should the project
maintain the current state of operations, thereby reinforcing the satisfactory
working relationships between the parties and the project's financial
performance, and stabilizing the project.

We could revise the outlook to stable if the project's DSCRs deteriorate from
current levels or if the project's operational performance weakens and impairs
relations between the parties.

Related Criteria And Research
All articles listed below are available on RatingsDirect on the Global Credit
Portal, unless otherwise stated.
-- Project Finance Construction And Operations Counterparty Methodology,
Dec. 20, 2011
-- Use of CreditWatch and Outlooks, Sept. 14, 2009
-- Updated Project Finance Summary Debt Rating Criteria, Sept. 18, 2007

Ratings List
CreditWatch/Outlook Action; Ratings Affirmed
To From
Catalyst Healthcare (Manchester) Financing PLC
Senior Secured Debt BB+/Positive/-- BB+/Stable/--
Recovery Rating 2 2

(Caryn Trokie, New York Ratings Unit)