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Rating Action:

Moody's rates new debt of The Walsall Hospital Company plc

02 Nov 2007
Moody's rates new debt of The Walsall Hospital Company plc

Approximately GBP149 million of new debt facilities rated

London, 02 November 2007 -- Moody's Investors Service has assigned a provisional (P)Aaa rating to approximately GBP149 million of index-linked guaranteed secured bonds due 2041 (the "Bonds") to be issued by The Walsall Hospital Company plc (the "Issuer"). The (P)Aaa rating of the Bonds is based solely upon the unconditional and irrevocable guarantee of scheduled principal and interest by Financial Security Assurance (U.K.) Limited ("FSA", Aaa insurance financial strength rating). The outlook on the (P)Aaa rating is stable

Moody's has also assigned a (P)Baa2 underlying rating to the Bonds, assuming that the financial guarantee insurance policy to be issued by FSA is absent. Moody's rating rationale for the (P)Baa2 underlying rating is set out in a pre-sale report which will be made available at www.moodys.com.

The Issuer will enter into a long-term project agreement (the "Project Agreement") with Walsall Hospitals National Health Service Trust in relation to the construction of approximately 36,000m2 of new facilities at the Walsall Manor Hospital and the provision of hard facilities management services during the term of the Project Agreement. The new facilities will include (i) a Diagnostic & Treatment Centre ("DTC") with specialist clinics and outpatient services, day case facilities and operating theatres; (ii) a Women's, Children and Young Persons Centre ("WCYP") which will provide integrated care for both inpatients and outpatient visitors with a dedicated diagnostic unit and operating theatre; (iii) a Multi-Professional Education Centre ("MPEC") providing training facilities; and (iv) a new reception area with shops, cafeterias and seating. The Project Agreement will become effective upon the date on which the Bonds are issued, and will have a term of 33 years and 2 months.

The Issuer will enter into a firm-price, date-certain construction contract with an unincorporated joint venture comprising Skanska Major Projects Limited ("SMPL") and Skanska Rashleigh Weatherfoil Limited ("SRW") which will substantially transfer construction risk. Both members of the joint venture are subsidiaries of Skanska AB and it will guarantee their obligations. Total construction cost will be approximately GBP149 million (excluding GBP13 million of advance works that have been carried out under the terms of a separate contract and a GBP9 million capital contribution that will be made by the Trust).

There are three construction phases. The WCYP and MPEC are due to be completed in April 2010 whilst the DTC and a new pathology laboratory are due in August 2010. Demolition of the buildings that are being replaced and landscaping to create a new visitors car park is expected to be completed in May 2011.

The primary source of revenue for the project is the monthly service payments ("Service Payments") under the Project Agreement, which step up during construction upon completion of key milestones, and which are adjusted for RPI indexation annually. In common with other NHS PFI hospital projects, Service Payments are subject to a performance monitoring regime. Failure to meet agreed levels of performance would lead to deductions being applied to the Service Payments and the award of service failure points which would count towards certain thresholds for warning notices. Sustained poor performance may lead to termination of the Project Agreement. Moody's assesses revenue risk as low, which is typical for PFI accommodation projects with availability-based payment mechanisms.

The Issuer will retain lifecycle risk in relation to the new facilities (but not the existing facilities) - such lifecycle risk is mitigated by a market standard cash reserving mechanism. The Issuer will subcontract the provision of hard facilities management services to SRW and Moody's deems Project Co's exposure to operational performance risk in relation to the performance of the subcontractor to be low. The Issuer will not be responsible for the provision of any soft facilities management services or any other services.

The Bonds benefit from financial covenants and a security package which are market standard for a transaction of this nature. Cashflow sensitivities in relation to the construction period and the operational period indicate that the Project is robustly structured, consistent with the Baa ratings category. Moody's currently rates a number of NHS PFI hospital projects and, based on Moody's analyses of comparator transactions, the underlying rating is appropriately positioned at (P)Baa2.

The rating of the bonds will follow the rating of FSA. The underlying credit is exposed to challenges during both the construction and operations. Factors that would cause the underlying rating to be downgraded include material delays in the construction works, or deterioration in the credit profile of Skanska AB.

The underlying rating has some potential for upgrade following successful completion of the construction phase.

The Issuer is wholly owned by The Walsall Hospital Company (Holdings) Limited, which in turn is owned equally by Innisfree Nominees Limited (acting as nominee for Innisfree PFI Fund III Limited Partnership) and Skanska Infrastructure Investment UK Limited.

New York
Thomas J. Keller
Managing Director
Project Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

London
Neil Griffiths-Lambeth
Vice President - Senior Analyst
Project Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

No Related Data.
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