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Rating Action:

Moody's changes Healthcare Support (Newcastle) Finance plc's outlook to developing from positive

29 Nov 2013

London, 29 November 2013 -- Moody's Investors Service, ("Moody's") has today changed to developing from positive the outlook on the Baa2 ratings of the GBP197.8 million (plus GBP40million variation bonds) of 2.187% index-linked guaranteed senior secured bonds (the "Bonds") due 2041 issued by Healthcare Support (Newcastle) Finance plc (the "Issuer") and a GBP115.0 million index-linked guaranteed senior secured loan facility due 2038 provided by the European Investment Bank (the "EIB Loan") reflecting ongoing negotiations between key project parties in relation to completion of the remaining construction works. Concurrently, Moody's has affirmed these ratings.

The Issuer is a special purpose vehicle formed in 2005 to raise finance and on-lend it to Healthcare Support (Newcastle) Ltd ("ProjectCo"). ProjectCo entered into a 38 year agreement with the Newcastle upon Tyne Hospitals NHS Trust (which became the Newcastle upon Tyne Hospitals NHS Foundation Trust on 1 June 2006, the "Trust") to carry out (1) the construction of new facilities at the Trust's Freeman Hospital and Royal Victoria Infirmary sites; and (2) provide certain services during the term of the concession (together, the "Project").

RATINGS RATIONALE

"Today's rating action reflects that the Trust and other key project parties are in the process of negotiating a commercial settlement with respect to remaining construction matters, in advance of contractual milestones falling due in 2014" says John Carey, a Vice President - Senior Analyst in Moody's Infrastructure Finance Group and lead analyst for Healthcare Support (Newcastle) Finance plc. Subject to the terms of the settlement, an agreement between the key parties resulting in the handover of the Clinical Office Block would likely be credit positive for ProjectCo. Conversely, delays in the parties reaching an agreement will increase downward pressure on the credit ratings as proximity to a project agreement event of default increases.

Whilst all of the Project's clinical buildings, representing approximately 87% of total construction value, have been certified as complete, sign-off of the Clinical Office Block at the Royal Victoria Infirmary site remains outstanding. The Trust has not accepted handover of the Clinical Office Block as it believes that the asset does not meet its design specifications in a number of areas. There are minimal additional construction works which can be completed to address the remaining issues and therefore completion of the remaining construction works is dependent on a commercial settlement between the parties. Whilst negotiations are well progressed, it is uncertain as to when an outcome will be reached and what the consequence for ProjectCo will be. An agreement could include an extension of existing contractual longstop dates, which currently fall due in mid and late 2014 under the construction contract and project agreement respectively.

The Baa2 ratings reflect as positives (1) ProjectCo's long-term PFI contract with the Trust to carry out certain construction works and then provide hard facilities management services; (2) the successful construction completion of the vast majority of the construction works; (3) the competency and experience of Interserve (Facilities Management) Ltd, the provider of hard facilities management services, whose obligations are guaranteed by Interserve Plc; and (4) a range of creditor protections included within the financing structure, such as debt service and maintenance reserves.

However the ratings are constrained by (1) delays in the completion of the Clinical Office Block and subsequent residual construction matters, which may expose ProjectCo to additional costs (albeit recoverable from Laing O'Rourke Northern Limited) and risk of termination of the project agreement by the Trust for failure to meet construction longstop dates; and (2) the Project's high leverage, which reduces the Project's ability to withstand unexpected stress.

The Bonds and the EIB Loan are unconditionally and irrevocably guaranteed for payment of scheduled principal and interest by Syncora Guarantee (U.K.) Ltd. ("Syncora"). Syncora's rating was withdrawn on 8 November 2012 and therefore the ratings of the Bonds and the EIB Loan reflect the standalone credit quality of the Issuer.

WHAT COULD CHANGE THE RATINGS UP/DOWN

Moody's could upgrade the ratings if an agreement was reached between the Trust and other key project parties to deal with residual construction matters and to sufficiently extend the longstop dates for remaining construction works, as necessary.

Conversely, Moody's could downgrade the ratings if agreement between the relevant parties in relation to residual construction matters is not reached to the extent that the longstop date under the project agreement is at risk of being breached.

The principal methodology used in this rating was Operating Risk in Privately-Financed Public Infrastructure (PFI/PPP/P3) Projects published in December 2007. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

The Issuer and ProjectCo are wholly owned by Healthcare Support (Newcastle) Holdings Ltd which in turn is owned 20% by Interserve PFI 2003 Ltd (50.5% owned by Interserve's pension fund with the remaining 49.5% owned by Dalmore Capital), and 80% by Equion Health (Newcastle) Ltd, which is itself owned 18.75% by John Laing Infrastructure Fund ("JLIF") and 81.25% by Innisfree Nominees Ltd.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt 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 rating action on the support provider and in relation to each particular 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 rating action, and whose ratings may change as a result of this 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.

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

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.

John Sidney Carey
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
SUBSCRIBERS: 44 20 7772 5454

Neil Griffiths-Lambeth
Senior Vice President
Infrastructure Finance Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 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
SUBSCRIBERS: 44 20 7772 5454

Moody's changes Healthcare Support (Newcastle) Finance plc's outlook to developing from positive
No Related Data.
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