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20 Dec 1999
MOODY'S ASSIGNS Aaa RATING TO GTD SECURED INDEX-LINKED BONDS OF HPC KING'S COLLEGE HOSPITAL (ISSUER) PLC
Moody's Investors Service has assigned its Aaa rating to the GBP 92.44 million 3.443% Guaranteed Secured Index-Linked Bonds due 2004-36 issued by HpC King's College Hospital (Issuer) PLC. The rating of the bonds is solely based upon the unconditional and irrevocable guarantee of principal and interest by MBIA Assurance S.A. ("MBIA") pursuant to a financial guarantee insurance policy. The Aaa insurance financial strength rating of MBIA is based on the strong support provided by MBIA Insurance Corporation, its parent, whose own Aaa rating reflects the limited risk characteristics of the company's core operations, its steady growth and continuous profitability, ample claims paying resources, disciplined underwriting, and strong surveillance and loss mitigation expertise.
The issuer is a special purpose company which is ultimately owned by subsidiaries of Costain Group Plc ("Costain") (33.3%), a UK construction and contracting group, Skanska AB ("Skanska") (33.3%), an international construction and property management group, Sodexho Alliance S.A. ("Sodexho") (25%), an international catering and corporate services group, and Edison Capital (8.3%) (rated A3/P-2 at its funding subsidiary), the financial services arm of Edison International (A2/P-1), the international energy and infrastructure group.
The issuer will on-lend the proceeds of the bonds to HpC King's College Hospital Limited ("HpC"), a special purpose company ultimately owned by the same shareholders. Under the UK Government's Private Finance Initiative, HpC has been awarded by the King's Healthcare NHS Trust ("the Trust") a concession to build and maintain new clinical facilities and provide non-clinical services at the site of King's College Hospital in London. The concession lasts 35 years from contracted completion of construction and includes:
i) The demolition of an existing out-patients building (Bessemer Wing) and the construction in its place of a new 7-storey clinical building.
ii) The refurbishment of floors 3 to 9 of an existing building (Ruskin Wing).
iii) The provision during the life of the concession of building related non-clinical ("hard FM") services, comprising routine and life cycle maintenance, in respect of the Bessemer Wing only and of non-clinical hotel ("soft FM") services, comprising domestic, catering, linen and laundry and portering services, in respect of the whole of the Trust's site. The provision of soft FM services is due to commence in April 2000.
The source of repayment for the bonds will be revenues from the Trust, which is one of the largest NHS trusts in the UK. A teaching hospital, the Trust provides tertiary care as well as general acute care and emergency and accident services. The Trust operates within the catchment population of the Health Authority of Lambeth, Southwark and Lewisham and is principally located at Denmark Hill in South East London. In support of our rating of MBIA, Moody's examined the project's credit fundamentals.
The project benefits from predictable revenues, established from the outset in the concession agreement with the Trust. The payment mechanism essentially insulates HpC's net cashflows from the occupancy and usage levels of the Trust's medical facilities. Under its agreement with the Trust, HpC remains exposed to penalties (including termination) for unavailability of the new clinical building and substandard performance in the provision of the soft FM services. HpC will also have to bear any cost overruns in respect of the construction and refurbishment works and the provision of hard and soft FM services (for the latter, subject to the benchmarking and market testing provisions of the concession agreement).
In common with similar PFI deals, HpC has sought to mitigate a substantial part of the cost overrun risks associated with a single asset project through a number of contractual arrangements. Firstly, HpC has entered into a fixed time and budget design and build contract with a joint-venture between Costain Limited and Skanska UK Limited. The obligations of the two contracting firms under the building contract are joint and several (with a liability cap applying), and are backed by parent company guarantees from Costain and Skanska and, in part, by a surety bond provided by St. Paul International Insurance Company Limited, whose obligations are unconditionally guaranteed by its affiliate St. Paul Fire & Marine Insurance Company (rated Aa2 for insurance financial strength). Both Costain and Skanska have extensive experience of similar scale projects and have recently built hospitals.
Secondly, the non-clinical routine maintenance and hotel services to be provided by HpC will be subcontracted to Gardner Merchant Limited ("Gardner"), wholly-owned (indirectly) by Sodexho, on the basis of a fixed price contract for the whole life of the concession designed to mirror HpC's performance obligations under the concession agreement. Gardner is a leading provider of support services to the NHS and is involved in a number of PFI projects. Gardner's obligations under the service subcontract, which are subject to a liability cap, are backed by a guarantee from Sodexho.
Under the service subcontract, increases in the cost of providing the services are borne in the first instance by Gardner and, for the soft FM services only, passed on to the Trust at the benchmarking and market testing dates, which are set initially 10 years after commencement of the concession and every 7 years thereafter. At any such dates, Gardner could be replaced as the soft FM service provider. In case of default by Gardner (or any subsequent service provider), HpC will bear the risk of any incremental costs arising from its replacement (but in respect of the soft FM services only until the next benchmarking date). Penalty deductions for substandard service performance will be passed through to the service provider and the main risk for HpC in this respect is that consistent poor performance would lead to its default under the concession agreement. However, before such underperformance levels are reached, HpC has the right to replace the service provider and, if it fails to act, MBIA can exercise step-in rights.
HpC will be exposed to unavailability deductions if certain areas of the new clinical building do not meet the standards agreed with the Trust. HpC has negotiated the ability to pass on to Gardner unavailability deductions within certain limits (any benefit from this arrangement is linked to Gardner's continued role as service provider). While Gardner will be directly responsible for routine maintenance and for arranging life cycle maintenance works, HpC will retain the risk of cost overruns in respect of life cycle maintenance. Moody's believes that accurately forecasting and controlling life cycle maintenance works is the most substantial risk facing HpC. Forward looking life cycle maintenance reserve obligations are designed to provide liquidity in conjunction with major expenditure requirements and will be subject to regular review by MBIA's technical advisers.
HpC's robust revenue base, together with cost overrun mitigants, provides sufficient credit strength to enable the project to support high leverage, in Moody's opinion.
MBIA Assurance S.A. is a 99.99% owned subsidiary of MBIA Insurance Corporation, a monoline insurance company. The company guarantees timely payment of debt service in the event of an issuer's inability to do so. MBIA Assurance S.A. guarantees transactions originated by MBIA-AMBAC International, an unincorporated joint-venture between MBIA Insurance Corporation and Ambac Assurance Corporation. HpC King's College Hospital (Issuer) PLC is incorporated in England and Wales and is a special purpose finance vehicle for a project which plans to build and maintain a new clinical building and refurbish an existing one at the site of King's College Hospital in London, England.
No Related Data.
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