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Rating Action:

Moody's affirms Baa3 rating on UPP (Hull) Ltd's bonds; outlook remains negative

22 May 2020

London, 22 May 2020 -- Moody's Investors Service, ("Moody's") has today affirmed the Baa3 rating on GBP128 million fully amortising senior secured bonds due 2058 (the Bonds) issued by UPP (Hull) Ltd (the Issuer or UPP Hull). The outlook on the rating remains negative.

RATINGS RATIONALE

The Baa3 rating on the Bonds reflects as positives: (1) a long-term concession agreement with the University of Hull (UoH) to operate 1,750 on campus student rooms; (2) contractual credit or void protections that provide some mitigation against students withdrawing from rental agreements due to coronavirus-related restrictions on the UoH campus; (3) the continued availability of rooms and satisfactory service provision during the coronavirus outbreak; and (4) the strong track record of the project sponsor, UPP Group, in the UK student accommodation higher education sector.

The rating is, however, constrained by: (1) UPP Hull's exposure to demand risk and to associated potential volatility in rental rates, although several contractual provisions mitigate these risks; (2) prolonged UoH campus restrictions could lead to lower demand for UPP Hull rooms in the 2020/21 academic year; (3) reliance on the performance of a single university, which has itself experienced declining student numbers and applications in recent academic years; (4) low room occupancy of 84% for the 2019/20 academic year that resulted in a weak projected August 2020 annual debt service cover ratio (DSCR) of 1.08x, albeit there were some contributing factors that may have been more short term in nature; and (5) the long tenor of the bonds in the context of uncertainty in long-term student demand for UoH.

Following the UK government's guidance on social distancing measures, UoH (in line with other UK universities) switched to fully online teaching and closed many non-essential facilities. Accommodation buildings remain open and associated services such as catering and facilities management continue to be provided. There has not been a government requirement to close the university. However, most students have left campus and the large majority UPP Hull's rooms are unoccupied. Moody's base case is that campus restrictions remain in place until at least the start of 2021 and that demand for UPP's rooms will be constrained during that time period.

The project's contractual terms require UoH to pay rent to UPP Hull based upon the number of student rental agreements (SRAs) entered into for the 2019/20 academic year. Therefore UoH is required to pay rent based upon 84% room occupancy. UoH has paid two installments and is expected to pay the final installment within the contractual timeframe. Therefore Moody's expects 2019/20 rental revenue to be unaffected even if students have vacated rooms.

Approximately 50% of UPP Hull rooms have a SRA in place for the 2020/21 academic year. If these students subsequently withdraw from the SRA due to restrictions making it less attractive to live on campus, then UoH is still contractually required to make rental payments. UoH's payment obligation would not hold if the government ordered the closure of the site. Moody's base case scenario considers that no additional SRAs are signed for the remainder of 2020 with a subsequent increase to 85% of rooms in 2021. Under these assumptions Moody's estimates that the 2020/21 DSCR would be close to 1.0x. If signed SRAs are lower than the Moody's base case then, provided UoH fulfills its payment obligations, UPP Hull has sufficient funds in its debt service reserve account (DSRA) to ensure debt service can still be paid.

The rapid and widening spread of the coronavirus outbreak, the deteriorating global economic outlook, falling oil prices and asset price declines are creating a severe and extensive credit shock across many sectors, regions and markets. The combined credit effects of these developments are unprecedented. The university student accommodation sector is among the most significantly affected by the shock given its exposure to social distancing restrictions.

Moody´s regards the coronavirus outbreak as a social risk under its ESG framework, given the substantial implications for public health and safety.

RATING OUTLOOK

The outlook is negative reflecting the low room occupancy in 2019/20 and the downward pressure on 2020/21 demand caused by uncertainty about the duration of campus restrictions. In addition UPP Hull's long-term room occupancy rates are closely linked with UoH's ability to attract students. Student applications to UoH and acceptance of UoH offers have reduced for the last three years. If this trend continues it would further weaken the Issuer's credit profile.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATING

Moody's could upgrade the rating if (1) UoH experiences a period of sustained and consistent student number growth demonstrating continuing high demand for the university; and (2) the Issuer consistently achieves occupancy of 98% and rental rate increases at least equal to RPI.

Moody's could downgrade the rating if: (1) UoH does not make the final rent payment within the contractual timeframe; (2) UoH's 2020 student enrolment reduces by significantly more than in the sector overall; (3) campus restrictions do not ease over the next 12 months such that 2021/2022 occupancy is likely to be below the current level; or (4) DSCRs are below 1.25x for a sustained period due to insufficient demand for UPP's rooms.

PRINCIPAL METHODOLOGY

The principal methodology used in this rating was Global Housing Projects published in June 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBM_1077122. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The rating has been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

This rating is solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

At least one ESG consideration was material to the credit rating action(s) announced and described above.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Kunal Govindia
Vice President - Senior Analyst
Infrastructure Finance Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Kevin Maddick
Associate Managing Director
Infrastructure Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
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