Overview -- Consort Healthcare (Birmingham) Ltd. (ProjectCo) has successfully completed the construction of NHS hospital facilities in Birmingham, the U.K., on time and within budget. -- Operational performance and ProjectCo's relations with University Hospital Birmingham Foundation Trust (UHBFT) have improved. We consider an effective working relationship between the various parties in project finance transactions as supportive of ratings. -- We are therefore revising the outlook on the senior secured debt issued by Consort Healthcare (Birmingham) Funding PLC to stable from negative. We are also affirming our 'BBB-' issue rating on the senior debt issued by ProjectCo. -- The stable outlook reflects our view of the improvement in the relationship between ProjectCo and UHBFT. It also reflects our view that future deductions or service failure points will not be significant enough to reach relevant thresholds. Rating Action On Nov. 23, 2012, Standard & Poor's Ratings Services revised its outlook on the senior secured debt issued by the U.K.-based special-purpose vehicle Consort Healthcare (Birmingham) Funding PLC to stable from negative. At the same time, we affirmed our 'BBB-' long-term issue rating on the senior secured debt. The debt comprises GBP400 million index-linked senior secured bonds (including GBP50 million variation bonds) due 2044 and GBP250 million senior secured European Investment Bank (AAA/Negative/A-1+) index-linked and fixed-rate loans due 2039. The bonds and loans maintain an unconditional and irrevocable payment guarantee of scheduled interest and principal provided by FGIC UK Ltd. (not rated) and Financial Guaranty Insurance Co. (not rated), respectively. According to Standard & Poor's Ratings Services' criteria, a long-term rating on a monoline-insured debt issue reflects the higher of the rating on the monoline and the Standard & Poor's underlying rating (SPUR). Therefore, the long-term rating on the above issues reflects the SPUR. Rationale The outlook revision follows the completion of construction of NHS hospital facilities in Birmingham, the U.K., on time and within budget, and an improvement in both operational performance and the relations between Consort Healthcare (Birmingham) Ltd. (ProjectCo) and the University Hospital Birmingham NHS Foundation Trust (UHBFT). The outlook revision reflects our view that the project is now in a better state in terms of service delivery. ProjectCo signed a settlement agreement with UHBFT last year to clear an accumulation of service failure points (SFPs). In addition, ProjectCo has implemented the recommendations of an Ernst & Young audit on the performance of the maintenance and repair helpdesk. These two actions are stabilizing ProjectCo's relations with UHBFT. ProjectCo has an outstanding disagreement with UHBFT on unavailability deductions related to construction defects in the mortuary, skin laboratories, and pneumatic tubes facilities in one of UHBFT's hospitals. However, we understand that ProjectCo will pass these deductions to the construction contractor and therefore they will not affect the project. Furthermore, a performance development plan (PDP) aimed at gaining efficiencies through better reporting also appears to be working well. This, along with a commercial agreement, currently under negotiation, which aims to improve the definition of certain terms under the private finance initiative (PFI) contract, will in our view further reduce the risk of SFPs accumulating. Following the completion of construction on Aug. 17, 2012, ProjectCo is providing hard facilities management (FM), security, and car parking services to UHBFT's hospitals for 35 years, and information and communications technology (ICT) services for seven years and five months. The 'BBB-' debt ratings take into account the following project risks: -- The project is exposed to the counterparty risk of U.K.-based construction and engineering group Balfour Beatty (not rated) as shareholder, design, and construction contractor, and FM and security services provider. Although an integrated approach to project delivery has advantages such as enhanced coordination, it also exposes the project to Balfour Beatty's credit and performance risks. -- The project is exposed to unpredictable and detrimental actions by the main revenue counterparty, UHBFT. ProjectCo's accrual of a significant level of deductions since December 2011, mainly because of the unavailability of the aforementioned medical facilities due to construction defects, still remains in dispute. However, at the same time, operating performance over the past year has stabilized and ProjectCo's relations with UHBFT are improving. -- The project is exposed to the uncertainty of more than 30 years of capital replacement costs. This risk is partially mitigated by a three-year, forward-looking, life cycle reserve and a 12-year guarantee from the construction contractor for serious latent defects. -- The project has an aggressive financial structure, although this is typical of U.K. PFI projects. Senior debt to total funds is 92% (excluding receipts from UHBFT and Birmingham and Solihull Mental Health National Health Service Foundation Trust ), and, in our view, the debt amortization profile is aggressive (36% of debt matures in the last five years, and 62% in the last 10 years of the debt tenor). The base-case annual debt service coverage ratio is a minimum of 1.20x and an average of 1.23x, or a minimum of 1.13x and an average of 1.19x when we calculate it in line with our criteria. These risks are offset by the following credit strengths: -- Construction works on this GBP587 million project, which is the second largest PFI in the U.K., are now complete. -- 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 independent lenders' technical adviser (TA) regards as consistent with similar projects. -- ProjectCo is not responsible for the provision of soft FM services, such as catering, portering, and other help desk services, medical equipment, or sterile services, which UHBFT provides itself. -- UHBFT and BSMHFT, which are ProjectCo's main revenue source, are among the highest performing trusts in the U.K. National Health Service (NHS), and we believe that they will continue to meet their obligations to this project comfortably. 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 has GBP8.9 million in a "change in law" reserve and GBP1.49 million in an ICT reserve, both of which were fully funded as of March 30, 2012. The debt service reserve account is also fully funded and has a balance of GBP16.2 million as of March 30, 2012. Outlook The stable outlook reflects our view of the improvement in the relationship between ProjectCo and UHBFT. Although we still foresee the possibility of the periodic application of material levels of deductions or SFPs in future, we do not foresee them being significant enough to reach relevant thresholds. We could take a negative rating action if operations fail to satisfy UHBFT, evident from a rise in deductions and/or SFPs to the level where UHBFT could issue a warning notice, for example. We could also take a negative rating action if we perceive that the relationship between ProjectCo and the Trust has otherwise deteriorated. A positive rating action is currently unlikely, in our view, at least until ProjectCo has established a period of predictable relations with UHBFT for at least one year. 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. 21, 2011 -- Updated Project Finance Summary Debt Rating Criteria, Sept. 18, 2007 -- Criteria For Special-Purpose Entities In Project Finance Transactions, Nov. 20, 2000 Ratings List Ratings Affirmed Consort Healthcare (Birmingham) Funding PLC Senior Secured Debt BBB-/Stable Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column.