Fitch Affirms Derby Healthcare's GBP446.6m Bonds at 'BBB'; Outlook Stable

Tue May 13, 2014 10:33am EDT

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(The following statement was released by the rating agency) LONDON, May 13 (Fitch) Fitch Ratings has affirmed Derby Healthcare PLC's (DHC) GBP446.6m bonds, maturing in 2041, at 'BBB'. The Outlook is Stable. The affirmation reflects DHC's stable operational performance to date. DHC benefits from a strong pass-through of concession risks to a group of experienced contractors, as well as an excellent working relationship with the concession grantor, Derby Hospitals NHS Foundation Trust (the grantor). DHC is a project company holding a 40-year contract with the grantor to redevelop, maintain and provide services to the Royal Derby Hospital in Derby, UK, as part of the UK government's public private partnership (PPP) programme. The project has been operational since March 2009 when construction was completed. KEY RATING DRIVERS Fitch's ratings are based on the following factors, among others: Revenue Risk: Stronger As an availability-based project, revenue is derived from a unitary charge that is based on a well-defined performance regime and subject to deductions for adverse performance across the services provided (hard facilities management (FM), soft FM and sterile services). The project continues to see limited deductions. The unitary charge features some inflation-linkage and is structured to provide an element of natural hedging of DHC's cost base. Operation Risk: Midrange The involvement of seasoned project parties such as Innisfree (the sole sponsor) and Skanska (hard FM provider) is considered positive for the transaction. DHC is run by an experienced management team outsourced from a specialist PPP project operator currently responsible for 21 UK hospitals (Health Care Projects Ltd). Both ISS (soft FM provider) and Synergy (sterile services provider) have seen a considerable reduction in performance deductions following the implementation of revised performance regimes. Fitch continues to regard the strong working relationship between DHC and the grantor as supportive of the rating. This is evident in a range of measures that have been enacted to achieve cost-savings and enhance liquidity for the grantor, which is particularly important given tight central government budgets. Infrastructure Development/Renewal Risk: Midrange The project's lifecycle profile is slightly back-ended although this is mitigated by a three-year forward-looking maintenance reserve account (MRA), with any lifecycle underspend against budget ring-fenced to prevent distribution to sponsors. Based on reports from the technical analyst for the project (Faithful + Gould), Fitch has not identified any significant risks over the medium term. Debt Structure: Stronger The rated bonds are fixed-rate, fully amortising and have a two-year tail to concession maturity. The project also features a three-year MRA, a six-month debt service reserve account and a change- in-law reserve. As at end-December 2013, the actual minimum/average annual debt service coverage ratio (ADSCR) was 1.17x and 1.23x respectively, above lock-up thresholds. The latest Fitch rating case forecasts minimum/average ADSCR of 1.15x and 1.21x respectively. These metrics are consistent with the rating, albeit with limited room for deterioration. The project is most directly comparable to Meridian Hospital Company PLC (BBB+/Stable), another NHS Hospital PPP rated by Fitch, as it shares the same key sponsor (Innisfree) and soft FM provider (ISS). Meridian has stronger metrics (minimum/average ADSCR of 1.32x and 1.57x respectively), justifying the one-notch differential. RATING SENSITIVITIES Project revenues could be adversely impacted in a number of scenarios, including increased general costs, hard FM expenses and corporation tax. A sustained increase in lifecycle costs would likely result in negative rating action. A downgrade could also be caused by any operational issues that result in a sustained reduction in coverage (average ADSCR below 1.2x). Fitch may take positive rating action if average ADSCR is consistently above 1.3x. DHC's bonds benefit from a financial guarantee provided by MBIA Assurance S.A. Fitch does not assign any credit to the guarantee as it does not maintain a rating on the guarantor and therefore the rating of DHC's bonds solely reflects the project's underlying credit quality. Contact: Primary Analyst Ade Bamford Director +44 20 3530 1233 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Sean Rutter Analyst +44 20 3530 1679 Committee Chairperson Dan Robertson Managing Director +44 20 3530 1312 Media Relations: Francoise Alos, Paris, Tel: +33 1 44 29 91 22, Email: francoise.alos@fitchratings.com. Additional information is available on www.fitchratings.com. Applicable criteria, 'Rating Criteria for Infrastructure and Project Finance', dated 11 July 2012 and 'Rating Criteria for Availability-Based Projects', dated 18 June 2013, are available on www.fitchratings.com. Applicable Criteria and Related Research: Rating Criteria for Infrastructure and Project Finance here Rating Criteria for Availability-Based Projects here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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