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Rating Action:


11 Aug 1999
MOODY'S ASSIGNS Aaa RATING TO GUARANTEED SECURED INDEX-LINKED BONDS ISSUED BY ENDEAVOUR SCH PLC Moody's Investors Service today assigned an Aaa rating to the GBP137.4 million 3.6% Guaranteed Secured Index-Linked Bonds due 2005-31 to be issued by Endeavour SCH PLC ("Endeavour"). The rating of the bonds is solely based upon the unconditional and irrevocable guarantee of principal and interest by Financial Security Assurance (U.K.) Limited ("FSA UK") pursuant to a financial guarantee insurance policy. The Aaa insurance financial strength rating of FSA UK is based on the strong support provided by Financial Security Assurance Inc., its parent, whose own rating reflects the limited financial risk characteristics of the company's core business, its strong capital base, solid underwriting and surveillance efforts and profitable financial results.

Endeavour is a special purpose company which is ultimately owned 45.5% by Innisfree Partners Limited, a UK based institutional investor, 35.5% by Barclays Infrastructure Limited, an investment company ultimately wholly owned by Barclays Bank PLC (senior debt rated Aa2), and 19% by John Mowlem & Company PLC ("Mowlem"), a UK construction and contracting group.

Under the UK Government's Private Finance Initiative, Endeavour was awarded by the South Tees Acute Hospital NHS Trust (the Trust) a concession which lasts 30 years from contracted completion of construction:

i) to design and construct new buildings, refurbish the existing buildings and carry out related works at the South Cleveland Hospital, in Middlesborough, North East England;

ii) to provide non-clinical maintenance and hotel support services, including estate and maintenance services, grounds and garden services, help-desk, telecommunications, portering, security, car parking, linen and laundry, waste management, cleaning and catering services, to the hospital from the date of commissioning to the end of the concession period.

The source of repayment for the bonds will be revenues from the Trust, which was formed in 1992 and is one of the largest in the UK. The Trust serves a population of 300,000, but with a catchment area of up to 1 million for some of its specialist services. As a result of the project, two other hospitals will be closed and their operations re-sited at the new, enlarged and refurbished hospital.

In support of our rating of FSA UK, Moody's examined the project's credit fundamentals.

The project benefits from predictable revenues, established from the outset in the concession agreement. Even if, for example, the hospital was to be under-utilised by patients, this would have little adverse impact under the payment formula. Moreover, a not unduly harsh penalty regime should minimise any revenue deductions for substandard performance after the new hospital is commissioned.

In common with most PFI deals, Endeavour plans to mitigate a lot of the cost overrun risks associated with a single asset project through a number of arrangements.

Firstly, it has entered into a fixed time and budget construction contract with Mowlem Crown House Joint Venture, a contractual arrangement between Mowlem and Carillion Construction Limited (Carillion), formerly Tarmac Construction Limited (trading as Crown House Engineering). Both companies are well-established U.K. building contractors with experience of building projects of similar scale and complexity. Mowlem's and Carillion's obligations under the construction contract are joint and several, and guaranteed by Carillion's parent company, Carillion PLC (formerly part of Tarmac PLC). The construction contract is also backed, in part, by a performance bond provided by Zurich Insurance Company (Aa1 financial strength rating).

Secondly, the non-clinical routine maintenance and hotel services to be provided by Endeavour under the concession agreement will be subcontracted to Sovereign Hospital Services Limited (Sovereign), a subsidiary a Acumen Group Plc, an experienced facility manager which is wholly-owned by Mowlem. Sovereign's will enter into two subcontracts with Endeavour:

i) a maintenance services contract covering the routine estate and building related "hard" services (but not major maintenance) for the concession period at essentially fixed prices (Sovereign has the option to request that these services are market tested at year 10 and 20, but is obliged to submit a tender at a capped price); and

ii) a hotel services contract covering the "soft" services and lasting for 5 years from the date when the hospital becomes operational, again, at fixed prices. At the expiry of this contract, the hotel services will be subject to market testing and the cash impact of any resulting change in pricing will be passed through to the Trust. The same market testing provisions will apply at 5 yearly intervals throughout the concession.

Both contracts mirror Endevour's performance obligations under the concession agreement. Sovereign's obligations under the subcontracts will be guaranteed by Mowlem. Endeavour will bear the risk of any incremental cost resulting from a replacement of the hard and soft services provider (but in respect of the soft services only until the next market testing point).

However, Endeavour bears directly most of the risk relating to the cost of major maintenance of the building over the concession life (subject to certain criteria, 25% of the risk of asset and equipment failure is passed to Sovereign). The revenue structure will not enable any major maintenance cost overruns to be passed on to the Trust so Moody's believes that accurately forecasting and controlling this work is the most substantial risk facing the project company.

Endeavour's robust revenue base, together with cost overrun mitigants, provides, in Moody's opinion, sufficient credit strength to enable the project to support high leverage.

Financial Security Assurance (U.K.) Limited is an indirect wholly owned subsidiary of Financial Security Assurance Inc., a monoline insurance company. The company guarantees timely payment of debt service in the event of an issuer's inability to do so. Endeavour SCH PLC is incorporated in England and Wales and is a special purpose project company which plans to build and maintain the partly new and partly refurbished South Cleveland Hospital in Middlesborough, North East England.

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