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
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
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
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.
Moody's Investors Service Ltd.
44 20 7772 5454
Vice President - Senior Analyst
Moody's Investors Service Ltd.
44 20 7772 5454