Moody’s affirmed the A2 underlying debt ratings of seven UK hospital Private Finance Initiative (PFI) project issuers: Criterion Healthcare PLC, Endeavour SCH PLC, HPC King’s College Hospital (Issuer) PLC, United Healthcare (Bromley) Limited, Hospital Company (Swindon and Marlborough), Worcestershire Hospital SPC Plc and Baglan Moor Healthcare PLC; the A1 underlying debt ratings of two UK office accommodation PFI project issuers: Integrated Accommodation Services PLC and Exchequer Partnership (No.2) Plc; and the A2 underlying and backed debt ratings of one UK school PFI project issuer: Discovery Education PLC. The outlook on these issuers has been changed to negative, from stable.
RATING RATIONALE FOR AFFIRMING THE RATINGS AND CHANGING OUTLOOK TO NEGATIVE FROM STABLE FOR THE SEVEN UK HOSPITAL PFI PROJECT ISSUERS
The rating actions reflect that Moody’s assessment of the credit quality of the National Health Service (NHS) trust, NHS Foundation Trust or Welsh Health Board off-taker on each of the projects is linked to the UK government rating, and the growing systemic risk within the UK PFI hospital sector, which is apparent from a trend of higher average payment deductions, service failure points, and disputes across those PFI hospital schemes rated by Moody’s. This results in negative credit pressure, particularly across the more highly rated A2 hospitals.
The reasons for the increased level of payment deductions, service failure points and disputes, and the extent to which this reflects changes in actual levels of operating performance are not entirely clear. However, Moody’s identifies several recurring elements including an increased monitoring of performance, more rigid application of the payment mechanism, disagreement on the appropriate interpretation of the payment mechanism, and heightened focus on certain areas, for example, fire safety following the Grenfell disaster, with the significance of these factors varying across specific hospitals.
Criterion Healthcare PLC, Endeavour SCH PLC, HPC King’s College Hospital (Issuer) PLC, United Healthcare (Bromley) Limited, Hospital Company (Swindon and Marlborough), Worcestershire Hospital SPC Plc and Baglan Moor Healthcare PLC are special purpose companies formed to design, build and finance hospitals and provide facilities management and maintenance services pursuant to long-term availability-based concession agreements with respective NHS trusts, NHS Foundation trusts and Welsh Health Boards.
RATING RATIONALE FOR AFFIRMING THE RATINGS AND CHANGING OUTLOOK TO NEGATIVE FROM STABLE FOR THE TWO UK OFFICE ACCOMMODATION PFI PROJECT ISSUERS
The rating actions reflect that the credit quality of the off-taker on each of the projects is aligned with the UK government rating, which constrains the A1 underlying debt ratings of Integrated Accommodation Services PLC and Exchequer Partnership (No.2) Plc.
Integrated Accommodation Services PLC is a special purpose company formed to design and construct a new office building and subsequently provide facilities management services pursuant to a long-term PFI project agreement with the Secretary of State for Foreign, Commonwealth and Development Affairs.
Exchequer Partnership (No.2) Plc is a special purpose company formed to refurbish existing offices and subsequently provide facilities management services pursuant to a long-term PFI project agreement with the Secretary of State for Levelling Up, Housing and Communities.
RATING RATIONALE FOR AFFIRMING THE RATINGS AND CHANGING OUTLOOK TO NEGATIVE FROM STABLE FOR DISCOVERY EDUCATION PLC
The rating action reflects the change in outlook on the UK government rating and Moody’s assessment that local authorities’ credit quality is weakening as a result and that the credit quality of Dundee City Council is constraining Discovery Education PLC’s debt ratings. Additionally, the negative outlook reflects the weakening in the minimum Moody’s Debt Service Coverage Ratio (DSCR) compared to previous expectations, which is anticipated to fall to 1.02x in March 2023 (compared to a previously expected minimum DSCR of 1.13x), due to increased reserve funding requirements stemming from higher inflation and a lag between the indexation of revenue and debt.
Discovery Education PLC is a special purpose vehicle formed to design, build and finance six primary and two secondary school facilities and subsequently provide certain facilities management services under a long-term project agreement with Dundee City Council.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
WHAT COULD MOVE THE RATINGS UP/DOWN FOR THE SEVEN UK HOSPITAL PFI PROJECT ISSUERS
An upgrade is unlikely as the debt ratings are constrained by Moody’s assessment of the credit quality of the respective off-takers.
Moody’s could downgrade the debt ratings if the sovereign rating of the Government of the United Kingdom was downgraded if individual off-takers materially intensify their approach towards monitoring or enforcement, or if there was a material operational under-performance of a project company.
WHAT COULD MOVE THE RATINGS UP/DOWN FOR THE TWO UK OFFICE ACCOMMODATION PFI PROJECT ISSUERS
An upgrade is unlikely as the debt ratings are constrained by the credit quality of the respective off-takers.
Moody’s could downgrade the debt ratings if the sovereign rating of the Government of the United Kingdom was downgraded or if there was a material operational under-performance of a project company.
WHAT COULD MOVE THE RATINGS UP/DOWN FOR DISCOVERY EDUCATION PLC
An upgrade is unlikely as the debt ratings are constrained by Moody’s assessment of the credit quality of the off-taker (Dundee City Council).
Moody’s could downgrade the debt ratings if the rating of the Government of the United Kingdom was downgraded, or if the off-taker’s credit quality was to weaken otherwise. Additionally, further deterioration in DSCRs or a weakening in operational performance and/or relationships between project parties could also lead to a downgrade.
