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26 May 1999
MOODY's ASSIGNS Aaa RATING TO GUARANTEED SECURED INDEX-LINKED BONDS ISSUED BY CRITERION HEALTHCARE PLC
Moody's Investors Service today assigned an Aaa rating to the GBP64.6 million 3.37% Guaranteed Secured Index-Linked Bonds due 2003-31 to be issued by Criterion Healthcare PLC ("Criterion"). 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.
Criterion is a special purpose company which is ultimately owned 36% by Charterhouse Project Equity Investments Limited (a wholly owned subsidiary of Charterhouse plc, a UK based investment banking group), 24.02% by Health Care Development Advisory Limited ("HCDA", a project finance boutique), 19.99% by Shepherd Securities (Healthcare) Limited ("SSH", an indirect wholly owned subsidiary of the UK construction and contracting company Shepherd Building Group Limited) and 19.99% by ISS Finance and Investment Limited ("ISS", a wholly owned subsidiary of ISS UK Limited).
Under the UK Government's Private Finance Initiative, Criterion was awarded a concession which lasts up to 60 years from contracted completion of construction, subject to rights of the South Durham Health Care NHS Trust to terminate the concession agreement, which are first exercisable after 30 years:
i) to design and construct a new 321 bed hospital and refurbish certain existing buildings, in Bishop Auckland, North East England, in order to replace an existing ageing hospital adjacent to the new site, and provide a wide range of medical services to the local population; and
ii) to provide non-clinical support services i.e. energy management/utilities services, life cycle and routine maintenance, materials management, administration and central facilities (hard services), catering, laundry, housekeeping, waste management, telecoms and site management services (soft services), to the new hospital from the date of commissioning to the end of the concession period.
The source of repayment for the bonds will be revenues from South Durham Health Care Trust (the "Trust"), which was formed on April 1, 1998 following the merger of the former Darlington Memorial Hospital NHS Trust, Bishop Auckland Hospitals NHS Trust and the Community Services from the former South Durham Community and Mental Health Service NHS Trust. The core function of the Trust, an independent entity, is to deliver health services to the local population to match the specifications agreed in contracts with the County Durham Health Authority, the Trust's main purchaser of services, and also the North Yorkshire Health Authority and primary care groups.
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 contract. 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, Criterion 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 Shepherd Construction Limited, a wholly owned subsidiary of Shepherd Building Group Limited, a well established U.K. building contractor with experience of building projects of similar scale and complexity. Shepherd Construction Limited's performance obligations under the contract are guaranteed by Shepherd Building Group Limited which in turn will be backed, in part, by a performance bond provided by New Hampshire Insurance Company (Aaa financial strength rating).
Secondly, all the non clinical services of Criterion will be subcontracted, to Jarvis Facilities Limited (a wholly owned subsidiary of Jarvis Plc) for hard FM services, the obligations of which will be supported, in part, by a performance bond provided by Liberty Mutual Insurance Company U.K. Limited in favour of the Issuer. Criterion has engaged ISS Mediclean Limited for the provision of soft FM services as required under the Concession Agreement. The obligations of the soft FM contractor are guaranteed, pursuant to a guarantee in favour of the Issuer by ISS UK Limited, subject to an agreed maximum liability. Both Jarvis Facilities Limited and ISS Mediclean Limited have experience in the provision of support services to the healthcare sector. The ISS Mediclean Limited contract with Criterion is subject to market testing every five years and the cash impact of any resulting change in pricing is passed through to the Trust at that time. The project company will bear the risk of any incremental cost resulting from a replacement of the soft services provider until the next market testing point, although this is partly mitigated by the establishment of a soft FM reserve.
Criterion'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. Criterion Healthcare PLC is incorporated in England and Wales and is a special purpose project company which plans to build and maintain a new hospital in Bishop Auckland, North East England.
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