Nov 16 -
Summary analysis -- The Coventry & Rugby Hospital Co. PLC --------- 12-Nov-2012
CREDIT RATING: None. Please see issue list. Country: United Kingdom
Primary SIC: Special Purpose
Mult. CUSIP6: G25526
The long-term ‘BB+’ rating on the GBP407.2 million senior secured bonds issued by U.K.-based special-purpose vehicle The Coventry & Rugby Hospital Co. PLC (CRH), and insured by MBIA U.K. Insurance Ltd. (MBIA U.K.; B/Negative/--), reflects Standard & Poor’s Ratings Services’ underlying rating (SPUR) on the bonds.
According to Standard & Poor’s criteria, a rating on monoline-insured debt reflects the higher of the rating on the monoline and the SPUR. In this case, the rating on the bonds reflects the SPUR as it is higher than the current rating on MBIA U.K.
The SPUR of ‘BB+’ on the bonds reflects a composite of credit factors outlined below.
CRH used the proceeds of the GBP407.2 million senior secured bonds to design, build, equip, and maintain hospital facilities at Walsgrave, near Coventry in central England. This was carried out under a 40.2-year private finance initiative (PFI) concession agreement with University Hospitals Coventry and Warwickshire National Health Service Trust (UHCWT) and Coventry Teaching Primary Care Trust. The latter’s obligation has since been transferred to the Coventry and Warwickshire Partnership Trust (CWPT).
The underlying ‘BB+’ debt rating reflects the following credit risks:
-- The project has an aggressive financial structure characterized by high leverage (senior debt to total funds is 91%), although this is typical of PFI projects in the U.K. CRH’s current projected minimum and average annual debt service coverage ratios (ADSCRs) are low at 1.15x and 1.22x, respectively (including interest income). According to our definition of ADSCRs, which excludes interest income, the forecast minimum and average levels are 1.06x and 1.12x, respectively.
-- The project’s reliance on interest income from cash balances is higher than we originally envisaged, and when compared with other similarly rated projects.
-- CRH is responsible for lifecycle risk to the buildings and medical equipment for the remaining concession period. Positively, however, the lifecycle risk associated with the provision of medical equipment has been passed to an experienced provider, GE Healthcare (GEH) a subsidiary of General Electric Co. (AA+/Stable/A-1+).
-- These factors are exacerbated by the medical equipment lifecycle expenditure profile. CRH forecast significant spikes in such expenditure every six to seven years to replace existing equipment. Although the obligation to deliver, and the underlying equipment cost exposure, is GEH‘s, CRH manages the liquidity to fund the requirements. Consequently, we believe that this could put increased pressure on the project’s liquidity during the years of peak expenditure.
These risks are mitigated by the following credit strengths:
-- The project, in our opinion, is effectively and proactively managed by CRH. Although Vinci Facilities (VF) is still managing the transition since it took over the provision of hard facilities management (FM) services at the end of last year, we believe that the Trusts, CRH, and the subcontractors have strong working relationships, and we have no specific concerns. This view is echoed by the Lender’s technical adviser (TA).
-- We believe that the project benefits from strong and experienced project participants. VF is providing hard FM services, backed by a parent company guarantee. ISS Facility Services (ISS; formerly ISS Mediclean), a market leader in U.K. health care PFI projects, is providing soft FM services. CRH has also contracted GEH to procure, maintain, and replace diagnostic medical and other equipment.
-- The project’s revenue stream is based on availability, with no volume or market exposure, negligible reliance on third-party revenues, and a payment mechanism that is consistent with other PFI projects. Significant deductions to project revenues are unlikely, except in the most extreme circumstances.
-- The project benefits from strong shareholder support.
VF continues to make progress with the delivery of hard FM services. Service failure points show some volatility from month to month, but are still comfortably below performance thresholds since the expiry of the grace period at the end of February 2012.
Financially, management accounts to the end of August 2012 show that operational cash flows are in line with budget. However, due to high levels of RPI in the recent past, bond payments are higher than budgeted and the project continues to be reliant on past cash reserving.
We understand that Skanska Infrastructure Development UK Ltd. has disposed of its 25% shareholding in CRH. Innisfree Nominees Ltd. now owns 100% of the company.
The project benefits from a six-month debt service reserve account, containing GBP13.8 million as of Aug. 31, 2012; a buildings lifecycle reserve account containing GBP1.8 million as of the same date; an equipment lifecycle reserve account containing GBP30.0 million; and a change-in-law reserve of GBP1.6 million.
The bonds have a recovery rating of ‘2’, reflecting our expectation of substantial (70%-90%) recovery in the event of a default.
In the event of a CRH default, compensation following termination by UHCWT and CWPT would, in our opinion, be most likely driven by a retendering of the contract, or by an exercise designed to ascertain the existing contract’s market value at the time of default. The recovery stresses that we apply in arriving at our recovery rating reflect such a scenario.
To date, however, there has been limited experience of loss or default regarding U.K. public-private partnership (PPP) or PFI projects.
The stable outlook reflects our view that operations will stabilize over the coming months as VF completes its mobilization, and that the strong working relationships that we observe between all parties to the project are maintained.
We could take a negative rating action if the relationships between the project’s participants deteriorate materially; if service failure points rise significantly; or if warning notices are issued. At the current rating level we see limited room for financial underperformance as reflected by, for example, the reported ADSCR. Consequently, a negative rating action could also result if the project’s financial profile comes under pressure from an escalation in costs or reduced interest income.
A positive rating action is only likely if the project’s financial profile improves materially. This could occur through the realization of significant reductions in costs or expenditures that do not have a substantially negative bearing on service provision or on the condition of the estate.
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
-- Updated Project Finance Summary Debt Rating Criteria, Sept. 18, 2007