Nov 28 -
Summary analysis -- BY Chelmer PLC -------------------------------- 28-Nov-2012
CREDIT RATING: None. Please see issue list. Country: United Kingdom
Primary SIC: Special Purpose
Standard & Poor's Ratings Services' 'BBB-' long-term rating on the GBP192.65
million index-linked senior secured bonds (including GBP30 million of variation
bonds) due 2043, issued by ProjectCo, reflects a composite of credit factors,
as detailed below.
The bonds retain an unconditional and irrevocable guarantee provided by Ambac
Assurance U.K. Ltd. (not rated) of payment of scheduled interest and principal
on the bonds. According to our criteria, the rating on a monoline-insured debt
issue reflects the higher of the ratings on the monoline insurer and the
Standard & Poor's Underlying Rating (SPUR). The long-term ratings on the bonds
therefore reflect the SPUR.
The underlying 'BBB-' rating takes into account the following risks:
-- ProjectCo has subcontracted lifecycle risk in full to Mid Essex
Hospitals Project Ltd. (MEHPL), which is a subsidiary of Bouygues S.A.
(BBB+/Stable/A-2). Unusually, the subcontract arrangements specify that MEHPL
is paid for lifecycle works according to a fixed schedule, irrespective of
whether the works are required or completed. As long as MEHPL and ProjectCo
have common shareholders, there should be sufficient incentives for MEHPL to
act in the long-term interests of the project. However, should Bouygues reduce
or divest its equity ownership of the project, ProjectCo may have limited
ability to influence lifecycle spending. In addition, ProjectCo benefits from
a 12-year latent defects liability period from MEHPL, and has implemented a
three-year forward-looking lifecycle reserve.
-- The aggressive financial structure is typical of the private finance
initiative (PFI) sector. The ratio of senior debt to total funds is 90%, and
the debt amortization profile is relatively back-ended. The operating
financial model updated to Sept. 30, 2012, reports a minimum debt service
coverage ratio (DSCR) of 1.16x in September 2033 and an average of 1.24x,
which is unchanged from the September 2011 financial model. Excluding interest
income in accordance with our criteria, the minimum DSCR falls to 1.09x in
2033 and the average is 1.18x. This compares to 1.10x minimum and 1.20x
average in the previous model. We consider this financial profile to be
relatively weak compared to peer projects due to the reliance on interest
These risks are offset by the following credit strengths:
-- Construction is now complete and the services are fully mobilized.
There are only a small number of defects outstanding, which are being repaired
-- The project has a strong rationale, given the Trust's position as the
regional center for plastic surgery and supraregional burns.
-- The project's delivery strategy is to integrate construction, hard FM
services, and lifecycle provision by various subsidiaries of Bouygues in its
capacity as sponsor, constructor, and FM and lifecycle works provider.
Bouygues is a leading participant in global infrastructure, with significant
experience of delivering large infrastructure and PFI projects.
-- The project has an availability-based revenue stream and minimal
volume or market exposure, with no reliance on third-party revenues.
The project has continued to perform strongly with a low level of service
failure points and financial deductions being incurred. Planned preventative
maintenance tasks have continued to be delivered as scheduled with no material
issues noted. Positively, the construction contractor has now completed the
replacement of defective movement joints throughout the hospital. There remain
a few areas where joints will be replaced at a later date due to access
restrictions. The failure of these joints was the cause of nearly all of the
service failure points and financial deductions incurred to date.
The project's liquidity is supported by a debt service reserve that is
maintained with a balance equivalent to the next six months of debt service
(principal and interest). Additional liquidity comes from major maintenance
and change-in-law reserves.
The stable outlook reflects our view that the project will continue to deliver
strong operational performance.
Given the project's relatively weak financial profile, we could lower the
long-term rating if operating performance or the financial profile were to
weaken. We could also lower the rating if the relationship between ProjectCo
and the Trust were to deteriorate materially, leading to an increased risk of
disputes or deductions.
An upgrade is unlikely in the medium term due to the project's relatively weak
Related Criteria And Research
-- Project Finance Construction and Operations Counterparty Methodology,
Dec. 20, 2011
-- Updated Project Finance Summary Debt Rating Criteria, Sept. 19, 2007