European Infrastructure Finance Yearbook - Investing In Bonds ...

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PROJECT FINANCE/PUBLIC-PRIVATE PARTNERSHIPS Publication Date: June 20, 2007 Issue Credit Rating: AAA (insured); BBB-(SPUR)/Stable (preliminary) Primary Credit Analyst: James Hoskins, London, (44) 20-7176-3393 Secondary Credit Analysts: Lidia Polakovic, London, (44) 20-7176-3985 Hugo Foxwood, London, (44) 20-7176-3781 138 ■ NOVEMBER 2007 PETERBOROUGH (PROGRESS HEALTH) PLC Rationale On June 20, 2007, Standard & Poor’s Ratings Services assigned its preliminary ‘AAA’ long-term insured debt rating to the proposed £442.8 million (including £50.0 million variation bonds) fixed rate guaranteed bonds due October 2042, to be issued by U.K.-based health funding special purpose vehicle Peterborough (Progress Health) PLC (ProjectCo). The preliminary rating reflects the unconditional and irrevocable payment guarantee of scheduled interest and principal provided by FGIC UK Ltd. (FGIC; AAA/Stable/--). At the same time, Standard & Poor’s assigned its preliminary ‘AAA’ long-term insured debt rating on the liquidity facility, change-in-law facility (CiLF), and swap facility provided by ABN AMRO Bank N.V. (AA-/Watch Pos/A-1+). The preliminary rating reflects the unconditional and irrevocable payment guarantee of scheduled interest and principal provided by FGIC. The preliminary underlying long-term ratings on the proposed debt are all ‘BBB-’ with a stable outlook. The debt and all the facilities have also been assigned preliminary recovery ratings of ‘2’, reflecting expectations of substantial (70%-90%) recovery of principal in the event of a default. Final ratings will depend on receipt and satisfactory review of all final transaction documentation, including legal opinions. Accordingly, the preliminary ratings should not be construed as evidence of final ratings. If Standard & Poor’s does not receive final documentation within a reasonable timeframe, or if final documentation departs from materials reviewed, Standard & Poor’s reserves the right to withdraw or revise its ratings. The proposed debt will finance the design, construction, and operation of three new buildings on two sites for three separate National Health Service (NHS) Trusts as part of the Greater Peterborough Health Investment Plan: • A new mental health unit will be built on the existing Edith Cavell Hospital site for Cambridge and Peterborough Mental Health Partnership NHS Trust (the MHU Trust). • A new acute hospital will be built on the existing Edith Cavell Hospital site for the Peterborough and Stamford Hospitals NHS Foundation Trust (the Acute Trust). • A new integrated care center will be built on the existing Peterborough District Hospital STANDARD & POOR’S EUROPEAN INFRASTRUCTURE FINANCE YEARBOOK site for the Greater Peterborough Primary Care Partnership Trust, which is acting through the Peterborough Primary Care Trust (the ICC Trust). All three Trusts are acting jointly, but not severally, via a project agreement (PA) with a term of 35 years and four months under a U.K. government private finance initiative (PFI) program. The Acute Trust has full termination rights over the project, as it will provide about 86% of the unitary payments, while the two smaller Trusts only have termination rights over the part they are responsible for. The preliminary ‘BBB-’ underlying senior debt and facilities ratings take into account the following project risks: • The project is exposed to the counterparty risk of unrated Australia-based construction group Multiplex Ltd. and a number of its U.K.-based subsidiaries--also unrated--as shareholder, design, and construction contractor, and hard facilities management (FM) services providers. Although this integrated approach to project delivery might have advantages such as enhanced coordination, there is no diversification of counterparty risk. • This is the first health construction project undertaken by Multiplex Ltd. in the U.K. Although the company has experience in complex construction projects worldwide, its experience in health construction is limited to a small number of relatively low-value projects in Australia. In line with standard industry practice, the works will be fully subcontracted in packages. Multiplex may, however, be subject to fallout from the difficulties it encountered during the construction of Wembley Stadium in terms of availability and pricing of suitable subcontractors. All fixed price appointments required before financial close have now been made, however, and the technical adviser, Faithful & Gould, considers them satisfactory. The size of the largest phase of construction (£280 million) may limit the number of contractors able to take over should Multiplex Construction (UK) Ltd. be replaced. • This is also the first hard FM contract Multiplex Facilities Management UK Ltd.
(Multiplex FM) has signed in the U.K. Multiplex FM has some health experience but on a smaller scale and with shorter contracts. It provides FM services to several hospitals in Australia totaling 2,100 beds-this PFI project alone provides 780 beds. The Australian contracts have an average duration of 10 years, significantly lower than for this project. The technical adviser has reviewed Multiplex FM’s processes and procedures and considers them satisfactory. • Unlike most rated PFI projects to date, the project makes use of a liquidity facility and CiLF instead of cash reserve accounts. The facilities have minimal drawstops and should provide relatively timely liquidity to the project if required. • The project is highly leveraged (94%) and the structure is quite aggressive with no tail. In lieu of a tail, a cash reserve is built up by the start of the last year of the concession, assuming sufficient cash is available. • ProjectCo is exposed to increased labor costs beyond those budgeted for, and for which it cannot claim relief from the Trusts through the market testing process. • The project is exposed to the uncertainty of more than 35 years of capital-replacement costs. • The contractor is dependent on key personnel. Given its lack of experience in the U.K., Multiplex Construction (UK) has had to recruit a new construction team specifically for this project. As this experience is vested within individuals, rather than the organization, Multiplex could be exposed if it failed to retain the services of these personnel, as it would need to recruit externally, and therefore may not be able to rapidly transfer staff internally if necessary. The following strengths mitigate these risks at the preliminary ‘BBB-’ rating level: • Construction risk is partially mitigated by an 18% (£60 million) LOC provided by ABN AMRO, which would be sufficient to fund construction delays of 12 months and replacement cost premiums of about 15% or more through the whole construction period. STANDARD & POOR’S EUROPEAN INFRASTRUCTURE FINANCE YEARBOOK PROJECT FINANCE/PUBLIC-PRIVATE PARTNERSHIPS • An LOC equivalent to about 20% of the annual hard FM fee and a cash reserve equivalent to about 20% of the annual hard FM fee (replaceable by an additional LOC for the same amount) by the planned commencement of full services provides third-party liquidity support for the hard FM services. This liquidity can only be removed once Multiplex FM has met specific performance and financial targets consistently over a three-year period. • There are alternative hard FM providers capable of undertaking the services if Multiplex FM is replaced. • A 24-month longstop date is included for the acute facility. This is significantly longer than for similar hospital projects (usually 12-18 months). The building contract longstop is 12 months, which gives ProjectCo a minimum 12 months to appoint a replacement contractor if necessary. • The Trusts have invested significant resources in assessing the design and working with Multiplex to develop and verify the details. In particular, all 1:50 scale drawings have been signed off by clinical user groups before financial close. • The construction works, although large, are relatively simple, with limited decanting and phasing requirements. A large part of the Acute and MHU hospital works are on a greenfield site next to the existing hospital. • Capital-replacement risk is partially mitigated by a three-year, forward-looking lifecycle reserve, and a 12-year guarantee from the construction contractor for latent defects. Sensitivity testing also indicates that ProjectCo could withstand significant increases in lifecycle costs before encountering financial distress. • Multiplex’s construction liability is limited only on termination to 55% of the construction contract sum. Termination liability steps down to 40% on completion of the Acute facility and to 20% six years after practical completion. In addition, the liquidated damages cap is sized to enable damages to be paid until the PA longstop date of 24 months from programmed completion. This is 60% of the expected construction period. NOVEMBER 2007 ■ 139
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November 2007 Infrastructure Financ
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CONTENTS Introduction STANDARD & PO
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INTRODUCTION 2007: New Challenges A
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COMMENTARY Publication Date: Sept.
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UTILITIES EUROPEAN UTILITIES Once a
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UTILITIES approach to ownership unb
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UTILITIES Publication Date: Aug. 29
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UTILITIES Publication Date: Nov. 12
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UTILITIES Publication Date: Aug. 17
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