OREANDA-NEWS. Fitch Ratings has changed the Outlook on Meridian Hospital Company Plc's (Meridian) GBP91.2m index-linked bonds due 2028 to Positive from Stable and affirmed them at 'BBB+'.

The Positive Outlook reflects our expectation of strengthening coverage of the project due to step-ups in the debt service coverage ratio (DSCR) in 2019 and 2024 with a forecast average DSCR of 1.63x over the project's remaining life. It also reflects the possible positive impact of our pending new criteria, (Fitch: Exposure Draft: Rating Criteria for Availability-Based Projects dated 18 June 2015 ) which, if implemented as currently drafted, could result in an upgrade of the bonds.

The affirmation reflects the project's solid operational and financial performance to date. The ratings continue to be supported by a predictable availability-based payment mechanism, a strong regulatory framework for NHS creditors, appropriate risk pass-through to contractors, adequate structural provisions and sound sensitivity analysis results.

Meridian, which has been in operation since 2001, holds a minimum 30-year concession with the Lewisham and Greenwich NHS Trust (LGT) to redevelop, maintain and provide services to the Queen Elizabeth Hospital in Greenwich, London, under the UK's government's private finance initiative (PFI) programme.

KEY RATING DRIVERS

Revenue Risk: Stronger
As an availability-based project, revenue is generated via a unitary charge based on a defined performance regime and is subject to deductions for adverse performance. In 2013 Queen Elizabeth Hospital was transferred to LGT, whose financial obligations are covered by the National Health Service Act 2006, obliging the government to honor its liabilities should it cease to exist, after the previous trust was placed into special administration.

The project additionally benefits from the government's "clarification letter", which specifies intervention by the Secretary of State for Health in a timely manner to rectify obligations specifically for this project (a form of non-binding liquidity support).

Operational Risk: Midrange
Both the hard and soft facility management (FM) providers - Vinci Construction UK Limited and ISS Mediclean Limited - have long-standing experience in operating PFI hospitals. Both operators' performance is satisfactory with a low level of unavailability and performance deductions over the past 12 months.

Infrastructure Development & Renewal: Midrange
The risk of life cycle cost remains with the project although this is mitigated by a three-year forward-looking maintenance reserve account and robust sensitivities results. Laing Investments Management Services Ltd conducted a full in-depth assessment of the life cycle costs in 2011 and confirmed the adequacy of the programme. The life cycle cost programme has also been approved by an independent technical advisor.

Debt Structure: Stronger
The rated bonds are fully amortising, with a tail of over two years to concession maturity. Structural features include a six-month debt service reserve account, a three-year forward-looking maintenance reserve account, lock-up provisions and a conservative default test conducted against the DSCR.

Financial Metrics
As at 31 March 2015, the actual DSCR for the previous 12 months was 1.48x, in line with Fitch's expectations. Our most recent rating case forecasts reflect an average DSCR of 1.63x and a minimum of 1.34x in 2018, around which it will remain prior to a significant step-up in the profile in 2019.

Peers
Meridian is most directly comparable with Derby Healthcare PLC (rated BBB/Stable), another publicly Fitch-rated PFI hospital, sharing the same key sponsor and, until recently, the same FM operators. Meridian's stronger metrics warrant rating differentiation.

RATING SENSITIVITIES
Prolonged period of poor operational performance with large deductions and/or termination of the FM contracts could trigger a downgrade if a replacement is not quickly found at similar costs.
The potential transformation of LGT into an NHS foundation trust with no additional explicit support from the government and subsequent deterioration of the trust's financial health could also put the project's ratings under pressure as could higher-than- projected lifecycle costs.
A DSCR consistently above 1.4x, coupled with a smooth operational performance and an established working relationship with the new trust, could result in a positive rating action.