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Rating Action:

Moody's upgrades Catalyst Higher Education (Sheffield) plc's rating to A3

26 May 2015

London, 26 May 2015 -- Moody's Investors Service, ("Moody's") has today upgraded to A3 from Baa1 the underlying rating of the GBP157 million of index-linked guaranteed secured bonds due 2045 (the Bonds) raised by Catalyst Higher Education (Sheffield) plc (CHE). Moody's has maintained the rating outlook at stable.

RATINGS RATIONALE

Today's upgrade reflects the high occupancy levels within CHE's accommodation over the last two academic years, combined with rental rates being in line with the financial close base case. Furthermore, CHE has satisfactorily performed its hard facilities management (FM) obligations with financial deductions being lower than 0.1% of annual rental income, and service failure points (SFPs) and unavailability events (UEs) being significantly below project agreement (PA) termination thresholds.

Since full completion of CHE's accommodation in 2010, room occupancy rates have exceeded 99% in each academic year except in 2012/13. The reduced occupancy of 89% in 2012/13 was driven by one-off events impacting all universities within England, specifically an increase in national tuition fees and lower A-level examination scores.

Since 1 January 2013 there have been zero SFPs and 183 Unavailability Events, both of which are well below the PA termination triggers of 16,000 SFPs over 12 months and 36,000 UEs over 12 months. We therefore consider a performance related termination of the PA to be very unlikely.

The A3 underlying rating reflects as positives (1) CHE's long-term PA with the University of Sheffield (UoS) to provide on-campus student accommodation and FM services for a 40-year period; (2) the Minimum Rental Payment (MRP) mechanism, which protects the project against falling demand by providing minimum guaranteed revenues equivalent to an average debt service cover ratio (DSCR) of 1.04x; (3) CHE's satisfactory track record of providing hard FM and lifecycle services with minimal deductions; (4) a range of creditor protections included within the financing structure, such as debt service and lifecycle reserves; (5) the positive reputation of UoS in the higher education sector; and (6) our expectation of a high level of recovery for lenders following any default by CHE.

The rating is, however, constrained by (7) the project's exposure to occupancy risk although somewhat mitigated by the MRP mechanism; (8) CHE's high leverage, which reduces the project's ability to withstand unexpected stress; and (9) the exposure of the project to high inflation rates as the rent setting mechanism does not include an automatic pass through of inflation.

The Bonds benefit from an unconditional and irrevocable guarantee of scheduled principal and interest under a financial guarantee insurance policy issued by Assured Guaranty (Europe) Ltd. (AG, rated A2 stable). The A2 rating of the Bonds is unchanged, and reflects the higher of (i) AG's insurance financial strength rating, and (ii) the underlying rating.

WHAT COULD CHANGE THE RATINGS UP/DOWN

CHE's exposure to accommodation demand risk, and the uncertainty around future demand over the life of the Bonds, make an upgrade unlikely unless CHE demonstrates a high occupancy level over a prolonged period.

We could downgrade the rating if occupancy rates or rental prices reduced such that revenue significantly declined, or if a negative external event made a revenue decline likely. We could also downgrade the rating if operational performance were to deteriorate leading to increased deductions or performance scores close to termination thresholds.

The principal methodology used in this rating was Operational Privately Financed Public Infrastructure (PFI/PPP/P3) Projects published in March 2015. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

Catalyst Higher Education (Sheffield) plc is a special purpose company that in May 2006 signed a PA with UoS to redevelop and refurbish part of the university's student accommodation and associated infrastructure and to provide hard FM services for 40 years. The accommodation is primarily new-build, with some limited refurbishment around the existing Endcliffe and Ranmoor student campuses. The project has been fully operational since September 2009.

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.

Kunal Jayant Govindia
Asst Vice President - 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

Donald Douglas Segars
Associate Managing Director
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 upgrades Catalyst Higher Education (Sheffield) plc's rating to A3
No Related Data.
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