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 income.
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 as necessary.
-- 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 financial profile.
Related Criteria And Research
-- Project Finance Construction and Operations Counterparty Methodology, Dec. 20, 2011
-- Updated Project Finance Summary Debt Rating Criteria, Sept. 19, 2007