Nov 20 - The announcement, on Oct. 29, 2012, by the special administrator to South London Healthcare National Health Service Trust (SLHT) of his recommendation to formally dissolve the trust and split it into three parts, throws into sharp relief the uncertainty caused by the deficits of U.K. National Health Service (NHS) trusts. If the government dissolves trusts that are counterparties to PFI projects (such as SLHT), what will that mean for PFI creditors? And if the threat of dissolution is putting more pressure on trusts to reduce their costs, could this lead to a heightened risk of defaults on PFI payments? In Standard & Poor's Ratings Services' opinion, recent intervention by the Secretary of State for Health, and by Monitor, the regulator for NHS Foundation Trusts, show how PFI creditors are likely to remain protected even in the event of financial failure by an NHS trust. In late June 2012, SLHT became the first trust to be placed under special administration (also known as the Unsustainability Providers Regime) by the Department of Health. Among other reasons, this was due to a significant recurring deficit, amounting to about GBP70 million for the financial year 2011/2012. A trust special administrator (TSA) was appointed on July 12, 2012, with a mandate to develop recommendations on SLHT's future. Its recommendation that the trust should split into three parts is now open to a 30-day consultation period, after which the TSA will work with an expert team to produce a report. We understand that a final decision on the proposed split is likely to be taken in February 2013. Several other NHS trusts have deficit positions that may lead them to being placed in special administration. Before this stage, however, we typically see less drastic regulatory interventions such as in the recent case of Sherwood Forest Hospitals NHS Foundation Trust (Sherwood Forest), the trust counterparty to Central Nottinghamshire Hospitals PLC (underlying rating BBB/Stable). On Oct. 5, 2012, Monitor stepped in by appointing a new interim chairman and requiring increased supervision after the trust posted a deficit of close to GBP6 million for the first quarter of financial 2012/2013. This action, coupled with concerns raised by the regulator about clinical tests for breast cancer, subsequently led to the resignation of the trust chair, vice-chair, and two other non-executive directors, as well as a number of other board members. Importantly, we note that in both the case of SLHT and Sherwood Forest, there has been no interruption in payments to the respective PFI hospital projects. PFI CREDITORS GAIN A DEGREE OF PROTECTION THROUGH LEGISLATION Project ratings are typically constrained by the credit quality of the main revenue counterparty. For PFI hospital projects, we assess this constraint in light of the overall support provided to the project's revenues by the government in the event that the counterparty ceases to exist or requires extraordinary government support. Under the NHS Act 2006, creditors to non-Foundation Trusts (such as SLHT) have some protection under legislation. The Act states that if a trust ceases to exist, then the Secretary of State for Health must ensure that all its liabilities (other than any criminal liabilities) are dealt with. For foundation trusts, in contrast, the relevant 2012 Health Care Act is less explicit, providing that a foundation trust can only be dissolved if (among other conditions) it has no liabilities. Importantly, PFI creditors typically benefit from additional protection, whether from a "letter of comfort" from the Secretary of State that gives further assurance to investors, or a "deed of safeguard." The latter places the Secretary of State under an obligation to make contractual payments to the project company in certain circumstances where the trust fails to meet its obligations. NHS TRUSTS' PUBLIC POLICY ROLE PROVIDES FURTHER SUPPORT While such protection to creditors does not provide what we would view as an unconditional and timely guarantee, we believe there is a very high likelihood that the government would provide extraordinary support so as to avoid a default on a PFI obligation. In addition to the aforementioned legislation and deeds of safeguard, there is a lengthy and consistent track record of the government providing extensive extraordinary support to NHS trusts--support that totals more than GBP1 billion over the past five years. The government also has strong financial incentives to intervene: If a trust triggers an event of default on its PFI obligations, the liability to pay the associated financial penalties, including breakage costs, could ultimately become the Secretary of State's liability. Furthermore, we view NHS trusts as having a very important public policy role, due to the government's responsibility in legislation to promote a comprehensive health service that is free at the point of use. And the political sensitivity around the NHS means that a default by a trust would not only have large political ramifications, but could also have implications for lenders' attitudes to public sector counterparties in other PFI sectors. Finally, as a 'AAA' rated government that has supported the NHS since its creation in 1948, the U.K. clearly has the financial and administrative capacity to provide extraordinary support on a timely basis. RELATED CRITERIA AND RESEARCH All articles listed below are available on RatingsDirect on the Global Credit Portal, unless otherwise stated.
-- Will PFI Debt Investors Catch A Cold From The Financial Strains Affecting Britain's National Health Service?, Nov. 3, 2011
-- NHS Trusts Retain Their High Credit Quality, Despite Unprecedented Financial Pressures And Uncertainty Over Structural Reforms, Nov. 3, 2011 Standard & Poor's, a part of The McGraw-Hill Companies (NYSE:MHP), is the world's foremost provider of credit ratings. With offices in 23 countries, Standard & Poor's is an important part of the world's financial infrastructure and has played a leading role for 150 years in providing investors with information and independent benchmarks for their investment and financial decisions.(New York Ratings Team)