S&P: Healthcare Support (Newcastle) Debt Ratings Raised To 'BB-' On Settlement Agreement And Remain On Watch Positive
The debt comprises a ?115 million senior secured European Investment Bank loan due March 2038, and ?197.82 million of senior secured bonds due September 2041. Both debt tranches benefit from an unconditional and irrevocable payment guarantee of scheduled interest and principal provided by Syncora Guarantee U. K. Ltd. According to our criteria, the issue rating on debt guaranteed by a monoline insurer is the higher of the rating on the insurer and the Standard & Poor's underlying rating (SPUR). Because we do not rate Syncora, the rating on the issues reflect the SPUR.
The recovery rating on the debt remains at '2', indicating our expectation of recovery of principal in the lower half of the 70%-90% range if there is a payment default that is not covered by the financial guarantee.
We raised the ratings because, in our view, the risk of a project default has diminished following the successful conclusion of the settlement agreement. The agreement concludes a long-running dispute between Healthcare Support (Newcastle) Ltd. (ProjectCo), the Newcastle-Upon-Tyne Hospitals NHS Foundation Trust (the Trust), and the project's construction contractor, Laing O'Rourke (LOR), and facilities management provider, Interserve (Facilities Management) Ltd., relating to the completion sign-off of the clinical office block (Phase 8 of construction) at the Royal Victoria Infirmary in Newcastle and to unavailability and performance deductions.
Moreover, this binding agreement--which will be executed through the signing of deeds of amendments--contractually marks the end of the project's construction phase and the transition to the operations phase. There is, however, a package of construction remedial works outlined by the agreement that LOR needs to undertake to rectify construction issues with the project's chilled-water pipe stem and fire-stopping. LOR will bear the majority of the rectification costs.
In addition to the remedial works, the agreement details the sum of money that needs to be paid to the Trust as the final resolution payment for all outstanding penalty points. It also defines a 2.18% reduction in the unitary charge to reflect the reduced project scope as a result of the carve-out of the phase 8 and 9 assets. The capital element of the unitary charge has not been reduced, however, given that ProjectCo continues to hold and service the project debt that was put in place at financial close, when the initial project and financing agreements were signed. Hence, we expect that the financial impact of the settlement agreement on ProjectCo will be limited.
As part of the agreement, there is a requirement to establish a dispute avoidance committee, to be chaired by an independent queen's council. We therefore believe that any future disputes between the project parties will be better managed. The committee will be responsible for deliberating on deductions to be applied by the Trust and on any other disputes that may arise between the project parties. The cost of the committee is to be shared equally by all parties.
The CreditWatch positive status indicates that we expect to raise the rating to at least 'BB+' within the next six months once the deeds of amendments have been executed and we have evidence that the remedy works are progressing. The signing of the deeds of amendments will mark the end of the project's construction phase and will contractually implement the terms outlined by the settlement agreement. The extent of the rating increase will depend upon our assessment of the financial health of the project post-implementation of the agreement and the extent to which we see positive evidence that the relationship between the Trust and the project parties is healing and that all parties can work together to minimize the risk of future conflicts and material penalty deductions.