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Rating Action:

MOODY'S ASSIGNS (P)Aaa RATING TO GUARANTEED SECURED BONDS TO BE ISSUED BY EXCHEQUER PARTNERSHIP (No. 2) PLC

16 Dec 2002
MOODY'S ASSIGNS (P)Aaa RATING TO GUARANTEED SECURED BONDS TO BE ISSUED BY EXCHEQUER PARTNERSHIP (No. 2) PLC

Approximately Euro 258 Million of Project Finance Bonds Affected.

London, 16 December 2002 -- Moody's Investors Service has assigned a (P)Aaa rating to approximately GBP 166 million Guaranteed Secured Bonds due 2005-36 to be issued by Exchequer Partnership (No. 2) PLC ("EP2"). The rating of the Bonds is solely based upon the unconditional and irrevocable guarantee of scheduled principal and interest by Financial Security Assurance (U.K.) Limited ("FSA") pursuant to a financial guarantee insurance policy. The Aaa insurance financial strength rating of FSA is based on the strong support provided by Financial Security Assurance Inc., its parent, whose own Aaa insurance financial strength rating reflects its strong business franchise, its low-risk and highly diversified insured portfolio, and its strong capital base.

Moody's has also assigned a (P)Baa2 rating to the underlying obligations of the Bonds without the benefit of the FSA guarantee.

The Issuer's (P)Baa2 underlying rating is based upon the low level of complexity of EP2's obligations under the concession awarded by the UK Government, the robust contractual structure of the project with guaranteed revenues based on committed and pre-determined payments from a Aaa-rated government off-taker and a comprehensive risk transfer to experienced subcontractors, sound cost budgets validated by FSA's independent technical advisers, and the resilience of the financial structure to downside sensitivities. However, the underlying rating also takes into account the project's high leverage and the resulting limited headroom to absorb unexpected events, under-performance by the subcontractors or ineffectiveness of the risk transfer arrangements.

The prospective ratings assigned to EP2 are based on information provided to Moody's as of 5 December 2002. Final ratings on the transaction may differ from the prospective ratings, based on subsequent changes in information, although Moody's does not currently expect this to be the case. Moody's will disseminate any subsequent changes through its ratings desk.

EP2 is a special purpose company, which is ultimately owned i) 42.5% by Bovis Lend Lease Holdings Limited ("BLLH"), the holding company for the European operations of the Bovis construction group, owned by Lend Lease Corporation Limited (Baa2), an international real estate and financial services group headquartered in Australia, ii) 42.5% by Stanhope Plc, a privately owned UK property development and consultancy company, and iii) 15% by Chesterton International Plc ("Chesterton"), a UK property consultancy and facilities management group.

Under its Private Finance Initiative ("PFI"), the UK Government has awarded EP2 a concession to refurbish, service and maintain office accommodation for HM Customs & Excise and Inland Revenue ("HMCE/IR"). The Project Agreement signed by EP2 with the Secretary of State for the Environment, Transport and the Regions follows the 1999 Treasury Taskforce Guidance on standard PFI contract terms. The Project Agreement extends until August 2037 and covers i) the refurbishment over 25 months of approximately 52% of the existing Government Offices in Great George Street, London, to provide office space for up to 1,500 staff, plus a number of staff facilities, ii) the provision of decant services for the move of HMCE/IR staff to the refurbished facilities, and iii) the provision of facilities management ("FM") services during the life of the concession.

As typical for PFI accommodation projects, the FM services comprise building related services ("hard FM") and other office management services ("soft FM"). The hard FM services include maintenance of the building fabric, mechanical, electrical and plumbing maintenance, pest control, maintenance of the fire engine, security and conveying systems, maintenance of the catering equipment and room and churn management. The soft FM services cover the provision of security personnel, cleaning and waste management and the helpdesk. Most of the soft FM services will be benchmarked and/or market-tested approximately 5 years after completion of the refurbishment phase and at 5-yearly intervals thereafter.

HMCE/IR will pay EP2 a monthly Unitary Payment on the basis of the availability of the office accommodation in accordance with pre-defined environmental and functional criteria and the performance of the contracted services. The Unitary Payment will be indexed annually on 31 March, partly to Retail Price Inflation and partly to a fixed inflator (2.5%), and will be subject to availability and performance deductions.

Although relating to essentially standard office accommodation, the project has some complex aspects since it involves the refurbishment of a Grade II* listed building (built between 1898 and 1917), subject to English Heritage's consent and supervision, in a central London area at the heart of the political district. However, Moody's notes that the project benefits from the experience of all participants in the refurbishment of the West side of the same building, successfully completed under a separate, but very similarly structured PFI project.

EP2 has sought to mitigate a substantial part of the cost overrun risks associated with its obligations through the transfer of risks to specialist subcontractors, effected by three principal subcontracts, the Building Contact with Bovis Lend Lease Limited ("BLL"), a subsidiary of BLLH, the Hard FM Contract with Bovis Lend Lease FM, a division of BLL, and the Soft FM Contract with Workplace Management, a division of Chesterton, which are generally back-to-back with the Project Agreement subject to a number of exceptions and subcontractor liability caps.

After a funding competition, the selected funding structure for EP2 is based on a conventional bond for the senior debt. Bond financing represents about 91% of committed funding for the project. Shareholder subordinated debt (loan stock), mezzanine debt and (minimal) equity contributions provide the remaining 9% and are, with the exception of the equity, back-ended.

Moody's notes that the typical funding split for PFI projects has normally been around 90% senior debt and 10% subordinated debt/equity. For EP2, the proportion of senior debt has been pushed beyond the 90% mark and, on this basis, the project is one of the most highly leveraged among those rated by Moody's. Moody's considers that the (P)Baa2 underlying rating is consistent with the low level of coverage for debt service -- minimum and average DSCR at 1.22 and a minimum LLCR at 1.26 -- primarily in consideration of EP2's relatively low level of exposure in all principal areas of fundamental project risk. Moody's has also factored in as important mitigants for the high leverage the requirement for adequate liquidity arrangements and FSA's monitoring and step-in rights under the project's Finance Documents.

To reserve a copy of Moody's Pre-Sale Report on EP2, describing the project's credit fundamentals and the analysis leading to Moody's assigning the (P)Baa2 underlying rating, contact Moody's Client Service Desk in London at +44-20-7772 5454 or, alternatively, access Moody's website at www.moodys.com.

Financial Security Assurance (U.K) Limited is a monoline insurance company with head office in London, United Kingdom. The company guarantees timely payment of debt service in the event of an issuer's inability to do so. Exchequer Partnership (No. 2) PLC has its head office in London, United Kingdom, and is a project company which plans to refurbish, service and maintain a government office building in London.

London
Stuart Lawton
Managing Director
Corporate Finance
Moody's Investors Service Ltd.
44 20 7772 5454

London
Monica Merli
Vice President - Senior Analyst
Corporate Finance
Moody's Investors Service Ltd.
44 20 7772 5454

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