European Infrastructure Finance Yearbook - Investing In Bonds ...

evenue), and base-case senior debt-service
coverage levels are a minimum of 1.19x and
average 1.21x, which is low but in line with
most recently rated PFI projects in the U.K.
In addition, forward and historical
distribution lock-up levels are slightly lower
than recent transactions at 1.125x.
The financial model, however, performs
satisfactorily under a range of
stress scenarios.
These risks are mitigated at this rating level by
the following credit strengths:
• The project receives an availability-based
revenue stream, with no volume or market
exposure, no reliance on third-party
revenues, and a relatively benign payment
mechanism.
• The experience and capability of Balfour
Beatty and its subsidiaries in their capacities
as sponsor, constructor, and facilities
maintenance (FM) provider.
• All individual schools will be 100% newbuild,
with construction on largely vacant
sites within the existing school sites.
Furthermore, the project is likely to benefit
from the portfolio effect of construction on
various sites.
• The FM service requirements are relatively
simple and, therefore, are likely to be within
the capabilities of the FM provider. In
addition, benchmarking and market testing
provides an adequate pass-through of
operational risks from ProjectCo.
• With the exception of the two schools
mentioned above, progress on the
construction is adequate to date, with a total
of eight sites (accounting for 11 schools)
completed so far, with works having
commenced on all tranche-2 schools as
anticipated. A number of minor grantorfunded
variations have been executed and
relations between parties continue to be
positive. Construction remains on schedule
for final completion and handover in
October 2008.
STANDARD & POOR’S EUROPEAN INFRASTRUCTURE FINANCE YEARBOOK
PROJECT FINANCE/PUBLIC-PRIVATE PARTNERSHIPS
Recovery analysis
The secured bonds and EIB loan have been
assigned a recovery rating of ‘2’. This indicates
Standard & Poor’s expectation of substantial
recovery of principal (70%-90%) in the absence
of a guarantee in the event of a debt default. To
date, however, there has been limited experience
regarding default or loss in this sector.
This recovery rating reflects the strong security
package, covenants, and contractual features for
compensation on termination that are inherent in
U.K. public-private partnership (PPP)
transactions. A key feature supporting this
assessment is the creditor-friendly U.K. insolvency
framework. Secured creditors of PPP transactions
with step-in rights that have floating charges have
additional advantages, because they are one of the
categories of creditors that can appoint an
administrative receiver to enforce security and
thereby control the insolvency process.
Additional features supporting Standard &
Poor’s expectation of substantial recovery include
the relative clarity of the termination regime
(although this is largely untested), the expectation
of timely repayment according to defined
procedures and dates by the procuring authority,
and the robust credit quality of the procuring
authority as payor of termination sums. Exposure
to authority credit default following termination
is, therefore, minimal.
Outlook
The stable outlook reflects our expectation that
the necessary rectification works at St. Ignatius
and Wishaw Academy Primary will be completed
to the satisfaction of ProjectCo and in a timely
manner. If further significant delays are
encountered or the rectification works are not
adequately completed the outlook may be revised
to negative or the rating lowered. There is
currently limited scope for an upgrade. ■
NOVEMBER 2007 ■ 143