European Infrastructure Finance Yearbook - Investing In Bonds ...

standard in U.K. PFI transactions. The creditorfriendly
U.K. insolvency framework gives secured
creditors of PFI transactions with step-in rights
who have floating charges the ability to appoint
an administrative receiver to enforce security and
thereby control the insolvency process.
Additional features supporting substantial
recovery include the relative clarity of the
termination regime (although this remains largely
untested), the expectation of timely repayment by
the Trusts according to defined procedures and
dates, and the robust credit quality of the Trusts
as payers of termination sums. Exposure to a
Trust credit default following termination is,
therefore, minimal.
The PA stipulates the mechanism for
determining how ProjectCo (and its lenders) will
be compensated for various events leading to
termination. In the event of a Trust default, force
majeure, or a voluntary termination,
compensation will fully cover senior debt service,
i.e. 100% recovery will be possible. As the Trusts’
responsibility is joint but not several, however, the
PA only terminates for Trust default if the Acute
Trust (representing 86% of the unitary payment)
defaults. If one of the two smaller Trusts defaults,
full compensation is payable to ProjectCo in
standard terms but the PA does not terminate.
The medical equipment services agreement does
not have any partial termination provisions.
A ProjectCo event of default arising from issues
like insolvency, prohibited change of control,
construction delay beyond the longstop date (24
months after the scheduled completion of the
Acute hospital), material breach of obligations, or
accumulation of excessive penalty points,
however, can trigger a termination where the
repayment of debt is not guaranteed by the Trust.
These scenarios have therefore been considered in
order to arrive at potential recovery rates.
STANDARD & POOR’S EUROPEAN INFRASTRUCTURE FINANCE YEARBOOK
PROJECT FINANCE/PUBLIC-PRIVATE PARTNERSHIPS
Senior lenders have step-in rights to resolve a
ProjectCo event of default. If termination occurs,
compensation is based on a market retendering
process (if a liquid market exists) or a net-presentvalue
calculation, less certain expenses.
Recovery rates for the project should improve
as time passes because debt will be paid down
and reserves built up. The recovery analysis
assumes a relatively unfavorable scenario where a
severe delay occurs in the initial years of
construction, with a substantial increase in costs
following contractor replacement. Scenarios that
reduce the unitary payment by various amounts
have also been considered, reflecting ProjectCo’s
inability to achieve its original operating
performance. The liquidity available to the project
through reserves (such as the guaranteed
investment contract) and cash is factored into the
analysis. The recovery scenarios also assume that
both the liquidity facility and the CiLF are fully
drawn at default.
Outlook
The stable outlook on the preliminary underlying
ratings reflects Standard & Poor’s expectation
that construction will proceed in line with the
planned program and budget. This expectation is
based on the contractor’s ability and the
professional team it has assembled, the favorable
opinion of the technical adviser on the proposals,
and the significant third-party construction
support provided. The rating could be lowered if
there were substantial delays in construction-increasing
concerns about the contractor’s ability
to deliver and maintain the hospitals--and/or
substantially higher-than-expected cost increases.
An upgrade in the short to medium term
is unlikely. ■
NOVEMBER 2007 ■ 141