Dec 07 -
-- U.K.-based special-purpose vehicle Transform Schools (North Lanarkshire) Funding PLC (ProjectCo) has maintained solid operational performance following the completion of construction in 2010.
-- ProjectCo’s credit metrics have remained stable and, in our opinion, are commensurate with a ‘BBB’ rating.
-- We are therefore raising our long-term issue rating on ProjectCo’s senior secured debt to ‘BBB’ from ‘BBB-'.
-- The stable outlook reflects our view that ProjectCo will maintain its good operating performance and continue to deliver financial performance in line with our forecasts.
On Dec. 7, 2012, Standard & Poor’s Ratings Services raised its long-term issue rating on the GBP88.7 million index-linked senior secured bonds due 2036, including GBP15 million in variation bonds, and the GBP70.0 million European Investment Bank (EIB; AAA/Negative/A-1+) loans issued by Transform Schools (North Lanarkshire) Funding PLC (ProjectCo), due 2034 to ‘BBB’ from ‘BBB-'. The outlook is stable.
The bonds maintain the unconditional and irrevocable payment guarantee of scheduled interest and principal provided by Syncora Gurantee Ltd. (not rated).
According to Standard & Poor’s 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 ratings on the above issues reflect the SPURs.
The upgrade reflects the stable operating performance of the project in the years since the completion of construction in 2010. ProjectCo has also maintained strong relationships with the grantor, North Lanarkshire Council. Following completion of construction, defects have been rare and performance and availability deductions have remained low.
Financial performance has also remained in line with our expectations, and in our view, at a level commensurate with a ‘BBB’ rating. Based on our definition of the annual debt service coverage ratio (ADSCR), which excludes interest income, we anticipate a minimum DSCR of 1.13x and an average of 1.18x over the remaining life of the project, which is not materially different to previous models. In our view, this is in line with similar ‘BBB’ rated transactions in the U.K. school private finance initiatives sector. The project continues to rely on its change in law and debt service reserve accounts to meet its final debt payment in 2036. Positively, even excluding such income, the ratios remain above the distribution covenant.
The ‘BBB’ debt rating reflects our view of the following credit strengths:
-- No construction risk;
-- Solid operational performance and strong project relationships;
-- A relatively benign payment mechanism; and
-- A strong and highly creditworthy revenue counterparty in North Lanarkshire Council.
These strengths are partly offset by the project’s “aggressive” financial risk profile and exposure to the uncertainty of 30 years of capital-replacement costs.
The project benefits from liquidity provided by a six-month debt service reserve account currently containing GBP7.2 million; a three-year, forward-looking, major maintenance reserve of GBP829,000 currently; and a change-in-law reserve of GBP2.0 million currently.
The stable outlook reflects our view that ProjectCo will maintain its strong operating performance and good relationship with North Lanarkshire council.
We could take negative rating action if the project’s financial profile weakens. This could occur as a result of higher-than-planned lifecycle expenditure. We could also lower the rating if Projectco’s relationships with related parties weaken, or if its service performance deteriorates.
We consider an upgrade unlikely at this stage, due to the project’s relatively low minimum ADSCR and the relatively back-ended amortization profile of the senior debt.
Related Criteria And Research
-- Updated Project Finance Summary Debt Rating Criteria, Sept. 18, 2007
-- Project Finance Construction and Operations Counterparty Methodology, Dec. 20, 2011
Transform Schools (North Lanarkshire) Funding PLC
Senior Secured BBB/Stable BBB-/Positive