October 26, 2012 / 2:10 PM / in 5 years

TEXT-S&P revises Catalyst Healthcare Manchester outlook

(The following statement was released by the rating agency)

     -- Catalyst Healthcare (Manchester) Financing PLC (ProjectCo) has largely 
resolved outstanding issues relating to the quality of facilities management 
(FM) at the NHS hospitals in Manchester.
     -- The improvement in FM has in turn improved the working relationships 
between ProjectCo, FM provider Sodexo, and the NHS Trust, with Sodexo and 
ProjectCo now more proactive in resolving issues.
     -- We are therefore revising the outlook on the senior secured debt 
issued by ProjectCo to positive from stable, and affirming our 'BB+' long-term 
issue rating on the debt.
     -- The positive outlook reflects the potential for an upgrade should the 
project maintain the current state of operations, all else being equal.

Rating Action
On Oct. 26, 2012, Standard & Poor's Ratings Services revised its outlook on 
the senior secured debt issued by the U.K.-based special-purpose vehicle 
Catalyst Healthcare (Manchester) Financing PLC (ProjectCo) to positive from 
stable. At the same time, we affirmed our 'BB+' long-term issue rating on the 
senior secured debt.

The senior secured debt comprises:
     -- GBP218.05 million of senior secured bonds (including GBP38 million in 
variation bonds) due in 2040; and 
     -- A GBP175 million senior secured loan from the European Investment Bank 
(EIB; AAA/Negative/A-1+) due in 2037.

The senior secured debt retains an unconditional and irrevocable guarantee 
provided by Ambac Assurance U.K. Ltd. (not rated) of payment of scheduled 
interest and principal. 

Under Standard & Poor's Ratings Services' criteria, a rating on a 
monoline-insured debt issue reflects the higher of the rating on the monoline 
and Standard & Poor's underlying rating (SPUR). The long-term debt rating on 
the bonds currently reflects the SPUR.

The outlook revision reflects our view that ProjectCo has largely resolved 
outstanding issues relating to the quality of facilities management (FM) at 
the NHS hospitals in Manchester. It also reflects what we see as the positive 
evolution over the past year of the working relationship between ProjectCo, FM 
provider Sodexo (BBB+/Stable/A-2), and The Central Manchester and Manchester 
Children's University Hospitals National Health Service (NHS) Trust (the 

There now appears to us to be a consensus on most issues, particularly on the 
quality of soft FM services that Sodexo provides. This issue had previously 
caused friction between the parties, and the Trust had been critical of the 
quality of FM provision. 

We consider an effective working relationship between the various parties in 
project finance transactions as essential because disagreements may result in 
performance deductions or the accumulation of service failure points (SFPs), 
and possibly impair credit quality. 

Although we consider that Sodexo has improved FM provision materially, we need 
to see that the improvement is sustainable. In addition, the Trust and 
ProjectCo need to regain complete confidence in Sodexo's service delivery.

We impute the improvement in FM to the fact that Sodexo has brought on site a 
team of executives with adequate experience to deliver services in line with 
the Trust's expectations. Sodexo is now giving the project the level of 
attention that it requires. In our view, if Sodexo sustains this standard of 
FM, it may eventually enable the project to enter a period of steady 
operations that we normally see within 1-2 years of the completion of 

Since the completion of the hospitals' construction in June 2009, ProjectCo 
has been providing maintenance and certain nonclinical services under a 
38-year project agreement to the Trust under a private-finance initiative 

The 'BB+' issue rating reflects the following credit risks: 
     -- The project's significant exposure to volatility (particularly 
short-term volatility) of the retail prices index (RPI). This is because 
various elements of the financial structure--including the bonds, EIB debt, 
unitary payments, and operational costs--are indexed against RPI, but with 
different effective dates. 
     -- An aggressive financing structure of 90% debt to 11% equity, with 80% 
of debt due for repayment over the 10 years prior to debt maturity.
     -- Some outstanding issues to resolve, despite the parties' progress over 
the past year. Two particular issues are the settlement of deductions that 
accrued for construction defects and a possible amendment of the payment 
mechanism relating to the calculation of SFPs.

The above weaknesses are offset by the following project strengths: 
     -- Availability-based revenues over the life of the concession;
     -- Strong consortium member companies with investment-grade-rated parents;
     -- FM services that are typical for U.K.-based PFI projects and that 
benefit from periodic market testing; and
     -- The fact that ProjectCo does not retain lifecycle risk.

The minimum and average debt service coverage ratios (DSCRs), excluding 
interest income, are 1.15x and 1.24x, respectively.

The project benefits from:
     -- A six-month, forward-looking senior debt reserve account; 
     -- A lifecycle reserve account that is structured on a three-year, 
forward-looking basis (accruing 100% lifecycle expenditures for the first 
year, 66% for the second, and 33% for the third); and 
     -- A change-in-law reserve covering 50% of total liabilities possibly 
arising under this circumstance. 

Recovery analysis
The recovery rating on the senior secured loan and bonds is '2', indicating 
our expectation of substantial (70%-90%) recovery of principal in the event of 
a payment default. To date, however, there has been limited experience of 
default or loss in this sector, and the value of potential recoveries depends 
on many factors relevant at the time of default. In addition, in our 
assessment, the discount rate we apply in our analysis has a material impact 
on the projected recovery values.

The positive outlook reflects the potential for an upgrade should the project 
maintain the current state of operations, thereby reinforcing the satisfactory 
working relationships between the parties and the project's financial 
performance, and stabilizing the project. 

We could revise the outlook to stable if the project's DSCRs deteriorate from 
current levels or if the project's operational performance weakens and impairs 
relations between the parties.

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. 20, 2011
     -- Use of CreditWatch and Outlooks, Sept. 14, 2009
     -- Updated Project Finance Summary Debt Rating Criteria, Sept. 18, 2007

Ratings List
CreditWatch/Outlook Action; Ratings Affirmed
                                        To                 From
Catalyst Healthcare (Manchester) Financing PLC
 Senior Secured Debt                    BB+/Positive/--    BB+/Stable/--
   Recovery Rating                      2                  2

 (Caryn Trokie, New York Ratings Unit)
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