Bangkok--31 Jul--S&P Global Ratings
MADRID (S&P Global Ratings) July 31, 2018--S&P Global Ratings today assigned its preliminary 'AA' long-term insured rating to the debt to be issued by U.K.-based limited-purpose vehicle Mount Oswald Colleges LLP (the project). The preliminary rating reflects the unconditional and irrevocable payment guarantee of scheduled interest and principal provided by Assured Guaranty (Europe) Ltd. and Assured Guaranty Municipal Corp. (collectively, Assured Guaranty).
The outlook is stable. The proposed debt comprises GBP94 million of amortizing index-linked bonds, due Feb. 28, 2064. The final issue rating will depend on our receipt and satisfactory review of all final transaction documentation, including legal opinions. Accordingly, the preliminary rating should not be construed as evidence of the final rating. If S&P Global Ratings does not receive the final documentation within a reasonable time frame, or if the final documentation departs from the materials reviewed, S&P Global Ratings reserves the right to withdraw or revise its rating.
The project will design, construct, and operate two colleges comprising 992 student rooms, plus associated hub buildings, for the University of Durham (Durham). The proposed debt issuance will benefit from an unconditional and irrevocable payment guarantee provided by Assured Guaranty. As a result, the preliminary long-term rating reflects that on the guarantor. One of the new colleges is a relocation of an existing college currently located on the Stockton campus (about 25 miles southeast of Durham). The other college is entirely new construction.
The university will undertake marketing and allocations to the new colleges on behalf of the project, and on an equal basis to the other colleges. Both new colleges will comprise a mixture of undergraduate and postgraduate en-suite and shared-bathroom rooms, and a small number of flats. Durham is a collegiate university formed of 16 colleges, with all students joining one of the colleges. The colleges form the basis of student life on campus, being purely residential, and do not have any academic responsibilities. The project is backed by a 51-year nominations agreement with Durham expiring in 2071, representing a seven-year concession tail after the final repayment date of the bonds.
The allocations process at Durham ensures an equal distribution of students across the colleges, and as such, the occupancy of a college is tied to the prestige of Durham as an institution rather than that of a specific college. Interserve Construction Ltd. is carrying out the construction, supported by a parental guarantee from Interserve PLC, and construction is scheduled for completion in February 2020. Campus Living Villages (Durham) Operations UK Ltd. (Campus Living Villages) will carry out facility management (FM) services for the operations and maintenance of the colleges. Campus Living Villages will assume FM services risk, but the project will retain lifecycle risk, which we consider standard for this type of transaction. The project is passing the majority of construction risk to Interserve Construction under a fixed-price (GBP82 million), date-certain, engineering, procurement, and construction contract.
Interserve Construction will therefore assume the majority of construction risk and is liable for all construction cost overruns and the costs associated with delays, subject to a standard cap on liability set at 60% of the total contract value. Interserve Construction, in our opinion, has sufficient experience and project-management capability to limit and manage the consequences of delays. Furthermore, the building contract is supported by a parental guarantee from Interserve PLC, 3% cash retention, and a 12% on-demand performance bond from HSBC Bank PLC.
We view the building task to be moderately complex in light of construction activities due to run concurrently for both colleges over a period of less than two years. We view this, along with the reliance on multiple subcontractors, as key risk factors to the completion of the construction task on budget and on time.