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19 Nov 2009
GBP 156.8 million of long-term debt instruments affected
London, 19 November 2009 -- Moody's Investors Service has today changed the outlook on the underlying
Baa3 rating of GBP156.8 million of index-linked senior secured
bonds due July 2045 (the Bonds) issued by Catalyst Higher Education (Sheffield)
plc (Catalyst) from stable to positive.
Catalyst is a special purpose company which in 2006 signed a project agreement
with the University of Sheffield (the University) to redevelop and refurbish
part of the University's accommodation and associated infrastructure,
and to provide certain Facilities Management (FM) services for a period
running until 2046.
The Bonds' Aa3 guaranteed rating reflects the benefit of an unconditional
and irrevocable guarantee of scheduled principal and interest under a
financial guarantee insurance policy issued by Financial Security Assurance
(U.K.) Ltd (FSA) whose insurance financial strength rating
is Aa3/negative reflecting its status as a subsidiary of Assured Guaranty
"The positive outlook reflects the successful completion of phase 4,
the final phase of construction, on time on 11 September 2009,"
says William Coley, Vice President - Senior Credit Officer
in Moody's Global Infrastructure Finance team. "However,
timely completion was only achieved after the construction subcontractor
recovered a substantial delay, reported at 7 weeks as recently as
June 2009. While timely completion has placed upward pressure on
the underlying rating - since debt for PFI projects will typically
transition to single A once construction risk is passed with steady-state
operation fully established, there are a number of uncertainties
which at present constrain the rating." These uncertainties include:
i) the technical adviser has not yet formally reported on overall construction
completion and is not expected to do so until the first operating period
report is issued in 2010, although informal feedback is positive;
ii) FM performance on the phase 4 units is not yet clear, although
early signs are good; iii) occupancy for the current year is below
expectation and the long term trend is now uncertain; iv) tax treatment
in respect of capital allowances is under review following publication
of new guidelines by HMRC in 2008; v) the financial model is in the
process of being updated. It is too early to assess whether the
low occupancy (down from 99% last year to 90% for the current
year) is a short-term effect, perhaps linked to uncertainty
over the timely completion of phase 4, or whether it is part of
a longer term trend driven by competing new-build accommodation
developments in the city. If the latter proves to be the case,
equity returns may be reduced but bondholders' credit exposure should
continue to be mitigated through the Minimum Rental Payment (MRP) mechanism
whereby the University effectively underwrites a pre-agreed level
of occupancy for each year, which at Financial Close resulted in
a minimum 1.10x senior debt cover ratio. Reliance on the
MRP mechanism might position the credit more weakly than some PFI peers
that have transitioned to single A ratings, where cover ratios are
higher and revenue is solely derived from availability payments with no
demand-based exposure. Based on the latest draft run of
the financial model, our provisional conclusion is that bondholder
exposure has not changed materially from Financial Close expectations
in an MRP-only revenue scenario; however this will need to
be re-confirmed once the model is updated and agreed in due course.
Moody's assigned first-time ratings to the Bonds on 26 May 2006.
The last rating action on the Bonds was when FSA's insurance financial
strength rating was confirmed at Aa3, with negative outlook,
on 12 November 2009, concluding a review for possible downgrade
initiated on 20 May 2009.
Historically the principal methodology used in rating the Bonds was Moody's
methodology for Construction Risk in Privately-Financed Infrastructure
(PFI/PPP/P3) Projects, published in December 2007 and available
on www.moodys.com in the Rating Methodologies sub-directory
under the Research & Ratings tab. Going forward, the
principal methodology will be Moody's methodology for Operating Risk in
Privately-Financed Infrastructure (PFI/PPP/P3) Projects,
also published in December 2007. Other methodologies and factors
that may have been considered in the process of rating the Bonds can also
be found in the Rating Methodologies sub-directory on Moody's website.
Catalyst is a special purpose company which in 2006 signed a 40-year
project agreement with the University of Sheffield to redevelop and refurbish
part of the University's accommodation and associated infrastructure under
the UK's Private Finance Initiative.
VP - Senior Credit Officer
Global Infrastructure Finance
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Moodys changes outlook to positive for Catalyst Higher Education (Sheffield) plc
Thomas J. Keller
Global Infrastructure Finance
Moody's Investors Service
No Related Data.
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