-- Consort Healthcare (Birmingham) Ltd. (ProjectCo) has successfully
completed the construction of NHS hospital facilities in Birmingham, the U.K.,
on time and within budget.
-- Operational performance and ProjectCo's relations with University
Hospital Birmingham Foundation Trust (UHBFT) have improved. We consider an
effective working relationship between the various parties in project finance
transactions as supportive of ratings.
-- We are therefore revising the outlook on the senior secured debt
issued by Consort Healthcare (Birmingham) Funding PLC to stable from negative.
We are also affirming our 'BBB-' issue rating on the senior debt issued by
-- The stable outlook reflects our view of the improvement in the
relationship between ProjectCo and UHBFT. It also reflects our view that
future deductions or service failure points will not be significant enough to
reach relevant thresholds.
On Nov. 23, 2012, Standard & Poor's Ratings Services revised its outlook on
the senior secured debt issued by the U.K.-based special-purpose vehicle
Consort Healthcare (Birmingham) Funding PLC to stable from negative. At the
same time, we affirmed our 'BBB-' long-term issue rating on the senior secured
The debt comprises GBP400 million index-linked senior secured bonds (including
GBP50 million variation bonds) due 2044 and GBP250 million senior secured
European Investment Bank (AAA/Negative/A-1+) index-linked and fixed-rate loans
The bonds and loans maintain an unconditional and irrevocable payment
guarantee of scheduled interest and principal provided by FGIC UK Ltd. (not
rated) and Financial Guaranty Insurance Co. (not rated), respectively.
According to Standard & Poor's Ratings Services' criteria, a long-term rating
on a monoline-insured debt issue reflects the higher of the rating on the
monoline and the Standard & Poor's underlying rating (SPUR). Therefore, the
long-term rating on the above issues reflects the SPUR.
The outlook revision follows the completion of construction of NHS hospital
facilities in Birmingham, the U.K., on time and within budget, and an
improvement in both operational performance and the relations between Consort
Healthcare (Birmingham) Ltd. (ProjectCo) and the University Hospital
Birmingham NHS Foundation Trust (UHBFT).
The outlook revision reflects our view that the project is now in a better
state in terms of service delivery. ProjectCo signed a settlement agreement
with UHBFT last year to clear an accumulation of service failure points
(SFPs). In addition, ProjectCo has implemented the recommendations of an Ernst
& Young audit on the performance of the maintenance and repair helpdesk. These
two actions are stabilizing ProjectCo's relations with UHBFT. ProjectCo has an
outstanding disagreement with UHBFT on unavailability deductions related to
construction defects in the mortuary, skin laboratories, and pneumatic tubes
facilities in one of UHBFT's hospitals. However, we understand that ProjectCo
will pass these deductions to the construction contractor and therefore they
will not affect the project.
Furthermore, a performance development plan (PDP) aimed at gaining
efficiencies through better reporting also appears to be working well. This,
along with a commercial agreement, currently under negotiation, which aims to
improve the definition of certain terms under the private finance initiative
(PFI) contract, will in our view further reduce the risk of SFPs accumulating.
Following the completion of construction on Aug. 17, 2012, ProjectCo is
providing hard facilities management (FM), security, and car parking services
to UHBFT's hospitals for 35 years, and information and communications
technology (ICT) services for seven years and five months.
The 'BBB-' debt ratings take into account the following project risks:
-- The project is exposed to the counterparty risk of U.K.-based
construction and engineering group Balfour Beatty (not rated) as shareholder,
design, and construction contractor, and FM and security services provider.
Although an integrated approach to project delivery has advantages such as
enhanced coordination, it also exposes the project to Balfour Beatty's credit
and performance risks.
-- The project is exposed to unpredictable and detrimental actions by the
main revenue counterparty, UHBFT. ProjectCo's accrual of a significant level
of deductions since December 2011, mainly because of the unavailability of the
aforementioned medical facilities due to construction defects, still remains
in dispute. However, at the same time, operating performance over the past
year has stabilized and ProjectCo's relations with UHBFT are improving.
-- The project is exposed to the uncertainty of more than 30 years of
capital replacement costs. This risk is partially mitigated by a three-year,
forward-looking, life cycle reserve and a 12-year guarantee from the
construction contractor for serious latent defects.
-- The project has an aggressive financial structure, although this is
typical of U.K. PFI projects. Senior debt to total funds is 92% (excluding
receipts from UHBFT and Birmingham and Solihull Mental Health National Health
Service Foundation Trust ), and, in our view, the debt amortization
profile is aggressive (36% of debt matures in the last five years, and 62% in
the last 10 years of the debt tenor). The base-case annual debt service
coverage ratio is a minimum of 1.20x and an average of 1.23x, or a minimum of
1.13x and an average of 1.19x when we calculate it in line with our criteria.
These risks are offset by the following credit strengths:
-- Construction works on this GBP587 million project, which is the second
largest PFI in the U.K., are now complete.
-- The revenue stream is based on availability, with no volume or market
exposure, negligible reliance on third-party revenues, and a payment mechanism
that the independent lenders' technical adviser (TA) regards as consistent
with similar projects.
-- ProjectCo is not responsible for the provision of soft FM services,
such as catering, portering, and other help desk services, medical equipment,
or sterile services, which UHBFT provides itself.
-- UHBFT and BSMHFT, which are ProjectCo's main revenue source, are among
the highest performing trusts in the U.K. National Health Service (NHS), and
we believe that they will continue to meet their obligations to this project
comfortably. In addition, the project rationale is strong and supported by the
likelihood of high long-term demand for health care services in the local area.
The project has GBP8.9 million in a "change in law" reserve and GBP1.49 million
an ICT reserve, both of which were fully funded as of March 30, 2012. The debt
service reserve account is also fully funded and has a balance of GBP16.2
million as of March 30, 2012.
The stable outlook reflects our view of the improvement in the relationship
between ProjectCo and UHBFT. Although we still foresee the possibility of the
periodic application of material levels of deductions or SFPs in future, we do
not foresee them being significant enough to reach relevant thresholds.
We could take a negative rating action if operations fail to satisfy UHBFT,
evident from a rise in deductions and/or SFPs to the level where UHBFT could
issue a warning notice, for example. We could also take a negative rating
action if we perceive that the relationship between ProjectCo and the Trust
has otherwise deteriorated.
A positive rating action is currently unlikely, in our view, at least until
ProjectCo has established a period of predictable relations with UHBFT for at
least one year.
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. 21, 2011
-- Updated Project Finance Summary Debt Rating Criteria, Sept. 18, 2007
-- Criteria For Special-Purpose Entities In Project Finance Transactions,
Nov. 20, 2000
Consort Healthcare (Birmingham) Funding PLC
Senior Secured Debt BBB-/Stable
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the Global Credit Portal at www.globalcreditportal.com. All ratings affected
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