RPT-Fitch Affirms Bakethin Finance at 'A'; Stable Outlook

Wed Apr 9, 2014 8:22am EDT

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April 9 (Reuters) - (The following statement was released by the rating agency)

Fitch Ratings has affirmed Bakethin Finance Plc's (Bakethin) guaranteed GBP248m 5.87526% secured fixed-rate notes, due 2034, at 'A' with a Stable Outlook.

KEY RATING DRIVERS

The affirmation reflects the transaction's on-going stable performance. The rating is supported by the adequate operational performance of Northumbrian Water Limited (NWL; BBB+/Stable), the strong funding status of the UK Environment Agency (EA), and the stable refinance risk assessment. Securitised cash flows are in line with expectations at the time of the transaction's issuance, and reserves remain high at 7.1% of the outstanding bonds.

The latest annual independent engineering report, covering 1 April 2012 to 31 March 2013, suggests that NWL's operating performance under the Water Resources Operating Agreement (WROA) is adequate and as a result no changes in the Kielder Reservoir's 75-year lifespan are expected. NWL has confirmed that this remains the case. The reservoir continues to act as a strategic reserve in times of water shortage in the north-east of England and is also important for regulating river levels in the region. The EA's funding structure remains similar to that at close, whereby the EA could obtain liquidity from the UK Treasury's contingencies funds if required.

While the transaction will start to amortise in July 2014, Bakethin is structured with a bullet repayment in 2034 sized at 64.8% of the current outstanding rated debt. The ability to refinance the then outstanding notes in 2034 will depend on market and financing conditions at that time, the remaining lifespan of the reservoir and the actual annual sum received in 2034, which will depend on inflation trends. In this respect, Fitch's refinancing risk assessment has remained stable considering the reservoir's unchanged forecast remaining lifespan of 45 years from the maturity date and the higher than expected average RPI growth (of c. 3% per annum) recorded since the transaction closed in May 2004, which is credit positive.

RATING SENSITIVITIES:

Bakethin's ratings may come under downward pressure in the event of a substantial deterioration of NWL's operating or financial performance, the condition of the assets or a downgrade of Belfius Bank (unless accompanied by remedial measures) or an adverse change in the funding status of the EA. Bakethin is a securitisation of payments from the EA to NWL under the WROA. Under this agreement, as owner and operator of the Kielder Reservoir, NWL is responsible for the operation and maintenance of the reservoir on behalf of the EA. In return for NWL's capital investment in the reservoir, the EA is obliged to pay NWL an annual sum and to reimburse the related operating costs incurred by NWL. This annual sum increases with UK RPI inflation, but the transaction benefits from a fixed-to-retail price index (RPI) swap with Belfius Bank until 2034, swapping out the RPI and receiving a 2.56% p.a. fixed increase.

Fitch withdrew its 'AA' Insurer Financial Strength rating on Assured Guaranty (Europe) Ltd and other related entities on 24 February 2010. While the rated bonds benefit from a financial guarantee issued by Assured Guaranty that unconditionally and irrevocably guarantees payments of interest and principal as well as the issuer's payment obligations under the RPI swap, Fitch's ratings on the guaranteed bonds does not give credit to Assured Guaranty and solely reflects the project's underlying credit quality.

NWL is a private limited liability company incorporated in England and Wales, which operates as a "relevant undertaker" under the Water Industry Act of 1991, the legislation under which the UK water industry was privatised. The Kielder reservoir is the largest man-made lake in Northern Europe, with a shoreline of 27.5 miles (44.3km) and a usable storage capacity of 200 billion litres of water.

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