Research Update: Healthcare Support (North Staffs) Finance Outlook Revised To Stable On Operating Risk; 'BBB-' Issue Ratings Affirmed Primary Credit Analyst: Manuel Dusina, London (44) 20-7176-5530; manuel.dusina@standardandpoors.com Secondary Contact: Robin M Burnett, London (44) 20-7176-7019; robin.burnett@standardandpoors.com Table Of Contents Overview Rating Action Rationale Outlook Related Criteria And Research Ratings List WWW.STANDARDANDPOORS.COM/RATINGSDIRECT SEPTEMBER 13, 2013 1
Research Update: Healthcare Support (North Staffs) Finance Outlook Revised To Stable On Operating Risk; 'BBB-' Issue Ratings Affirmed Overview In our view, operating risk at U.K.-based special-purpose vehicle Healthcare Support (North Staffs) PLC (ProjectCo) is higher than we previously anticipated, due to the incurrence of service failure points and warning notices in relation to cleaning and portering services at the University Hospital of North Staffordshire. ProjectCo and the Trust are negotiating a resolution of these issues through the execution of a Memorandum of Understanding. However, we understand that such execution is not imminent, due largely to personnel changes at the Trust. We are therefore revising our outlook on the senior secured debt issued by ProjectCo to stable from positive, and affirming our 'BBB-' issue ratings on the debt. The stable outlook reflects our view that the project's strong credit metrics for the 'BBB-' rating offset the increased level of operating risk. Rating Action On Sept. 13, 2013, Standard & Poor's Ratings Services revised to stable from positive its outlook on the senior secured debt issued by the U.K.-based special-purpose vehicle Healthcare Support (North Staffs) Finance PLC (ProjectCo). The debt comprises 190.0 million of index-linked guaranteed senior secured bonds (including 33.0 million of variation bonds) due 2043; and a 154.6 million European Investment Bank (AAA/Negative/A-1+) senior secured index-linked loan due 2039. At the same time, we affirmed our 'BBB-' issue ratings on the senior secured debt. The senior secured debt retains an unconditional and irrevocable guarantee provided by MBIA U.K. Insurance Ltd. (B/Stable/--) 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 issue ratings on the bonds therefore reflect the SPUR. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT SEPTEMBER 13, 2013 2
Research Update: Healthcare Support (North Staffs) Finance Outlook Revised To Stable On Operating Risk; 'BBB-' Issue Ratings Affirmed Rationale The outlook revision reflects our view that the project has a higher level of operating risk than we previously anticipated. This risk is evident from the accumulation of a sufficient number of service failure points (SFPs) for portering and cleaning at the University Hospital of North Staffordshire (UHNS) to trigger warning notices. In particular, the University Hospital North Staffordshire NHS Trust (the Trust) issued ProjectCo with two warning notices in March 2013, following warning notices in April and July 2012. The incurrence of three warning notices in a five-month rolling period triggers an increased level of monitoring, and the incurrence of three warning notices in one month prompts the Trust to take control of the situation. The incurrence of more than a defined number of SFPs in a 12-month rolling period triggers the termination of the project agreement. Although the 12-month rolling totals of SFPs are currently within the contract termination threshold, we see a risk associated with the largely upward trend. More recently, there has been improvement in the cleaning services at UHNS, but not in the portering services. We understand the parties are currently negotiating a Memorandum of Understanding (MoU) to agree on a working interpretation of the provisions in the project agreement that specify cleaning standards and the use of the pneumatic tube system. We anticipate that the signing of the MoU will reduce the number of SFPs being issued. However, due to a high level of staff turnover at the Trust, we believe that a final agreement is not imminent. Positively, despite the ongoing issues, there appears to us to be a productive working relationship between ProjectCo and the Trust, supported by regular dialogue. The 'BBB-' underlying issue ratings on the senior secured debt reflects the following credit strengths: The successful and timely completion of the construction and handover of UHNS in June 2012, which triggered a step-up in unitary payments to ProjectCo to 100%. The revenue stream to ProjectCo is based on availability, with no volume or market exposure, and negligible reliance on third-party revenues. The project has a stronger financial profile than peer projects with the same ratings, with minimum and average debt service coverage ratios (calculated without interest income) of 1.19x and 1.21x, respectively. The project rationale is strong and supported by the likelihood of high long-term demand for health care services in the local area. The above strengths are, however, offset by the following risks: The project is exposed to hard and soft facilities management (FM) services from Sodexo Healthcare Ltd. (Sodexo) throughout the concession period. Sodexo continues to experience difficulties in the delivery of its soft FM services, notably domestic cleaning and portering, leading to the issue of SFPs in excess of warning notice thresholds. This has WWW.STANDARDANDPOORS.COM/RATINGSDIRECT SEPTEMBER 13, 2013 3
Research Update: Healthcare Support (North Staffs) Finance Outlook Revised To Stable On Operating Risk; 'BBB-' Issue Ratings Affirmed resulted in a higher level of operational risk than we previously anticipated and than at comparable projects. The project is exposed to the uncertainty of more than 32 years of capital-replacement costs, although, positively, this is only in relation to new-build facilities. The project has an aggressive financial structure, although this is typical of U.K. private finance initiatives (PFIs). Under the documentation, the project agreement could be terminated if the project accrues more than a defined number of SFPs in a 12-month rolling period. Although we recognize that the SFPs are currently below this threshold, we note there is an upward trend. Liquidity The project benefits from: A six-month, forward-looking, senior debt reserve account; A lifecycle reserve account, 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 83% of ProjectCo's maximum liabilities arising if the legislation governing PFIs changes; and A cash retention of 3%. Outlook The stable outlook reflects our view that the project's strong credit metrics for the current rating offset the increased level of operating risk. We could raise the issue ratings on ProjectCo's debt if following the implementation of the MoU, FM services, particularly soft FM services, improve to a satisfactory and sustainable level of about 50% of warning notice thresholds. This is provided the project's financial performance does not weaken materially. We could lower the issue ratings on ProjectCo's debt if soft FM services continue to incur SFPs and additional warning notices, leading to a heightened risk of the project breaching the project agreement termination threshold. We could also consider a downgrade if we see the project's financial profile weaken materially. Related Criteria And Research Counterparty Risk Framework Methodology And Assumptions, June 25, 2013 Project Finance Construction and Operations Counterparty Methodology, Dec. 21, 2011 Use Of CreditWatch And Outlooks, Sept. 14, 2009 Updated Project Finance Summary Debt Rating Criteria, Sept. 18, 2007 Criteria For Special-Purpose Entities In Project Finance Transactions, Nov. 20, 2000 WWW.STANDARDANDPOORS.COM/RATINGSDIRECT SEPTEMBER 13, 2013 4
Research Update: Healthcare Support (North Staffs) Finance Outlook Revised To Stable On Operating Risk; 'BBB-' Issue Ratings Affirmed Ratings List Outlook Action; Ratings Affirmed To From Healthcare Support (North Staffs) Finance PLC Senior Secured BBB-/Stable BBB-/Positive Additional Contact: Infrastructure Finance Ratings Europe; InfrastructureEurope@standardandpoors.com Complete ratings information is available to subscribers of RatingsDirect at www.globalcreditportal.com and at spcapitaliq.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column. Alternatively, call one of the following Standard & Poor's numbers: Client Support Europe (44) 20-7176-7176; London Press Office (44) 20-7176-3605; Paris (33) 1-4420-6708; Frankfurt (49) 69-33-999-225; Stockholm (46) 8-440-5914; or Moscow 7 (495) 783-4009. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT SEPTEMBER 13, 2013 5
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