Bangkok--23 Jul--S and P Global Ratings
LONDON (S&P Global Ratings) July 22, 2020—S&P Global Ratings today took the rating actions listed above.
CNH issued a 351.9 million index-linked senior secured bond (including a 32.0 million variation bond) due 2042 to finance the design, construction, and operations of the hospital facilities at three sites--King's Mill Hospital, Mansfield Community Hospital, and Newark General Hospital, for the trust) and NHS Property Services Ltd. (formerly Mansfield and Ashfield Clinical Commissioning Group).
The bonds were issued in 2005 under a 37-year private finance initiative concession agreement. Construction was completed in 2011. Hard facilities management (FM) services are provided by Skanska Facilities Services (SFS), which is part of Skanska AB. Compass Contract Services (UK) Ltd., trading as Medirest Ltd., provides soft FM services.
STRENGTHS
The senior debt benefits from a guarantee of payment from AGE.
There is an availability-based revenue stream with no exposure to volume or market risk.
RISKS
Weak performance in operations as per the project agreement's requirements has led to a high number of service failure points (SFPs) since an independent third-party review of the contractual payment mechanism at the end of 2018.
The breach of the contractual thresholds due to the high number of SFPs allows the trust to unilaterally terminate the agreement; and creditors to accelerate repaying the senior debt due to a persisting event of default.
Relationships among the parties are strained.
ProjectCo retains the risk that required lifecycle expenditures might exceed budget.
The trust's growing frustration increases the risk of triggering an event of default and terminating of the project.
The trust has been refraining from taking any contractual actions despite the number of SFPs it has issued exceeding the termination thresholds under the project agreement. In our view this is because the SFPs were largely due to failures in communicating to the trust the timing, scope, and cost of the planned preventative maintenance works; and reporting, rather than actual, failures in delivery of services.
Although the trust had acknowledged SFS's and Medirest's excellent response under COVID-19, following the recent performance failures, it is considering issuing additional formal warning notices for the first time.
The issuance of warning notices per se does not have material detrimental consequences, because it leads to increased monitoring and imposes a requirement on ProjectCo to deliver a remedy plan. However, it signifies that the trust's level of dissatisfaction has reached the point at which it might take action it is entitled to under the project's documentation. Since 2018, CNH has breached several times the events of default thresholds under the collateral deed for incurring excessive SFPs.
CNH has not reached a settlement agreement that would clear SFPs.
ProjectCo has intended to agree to a service improvement plan and compensate the trust for the underperformance, in return for agreeing a settlement agreement under which the trust would cancel the SFPs. However, after nearly two years and a number of attempts, the settlement agreement has not been reached. While COVID-19 rediverted the parties' attention to service delivery rather than negotiations, the trust continues to be entitled to terminating the project.
The settlement agreement might be delayed by another year.
The trust is offering a head of terms agreement, one of the conditions of which would be for SFS to implement a service improvement plan. Only if the plan is delivered and services are indeed improved over the next 9-12 months will the trust sign the agreement, clearing all the historical SFPs. While SFS and its consultants have submitted a service improvement plan to the trust, signing the agreement will depend on the contractors' performance.
Senior lenders continue reserving the right to accelerate the debt in case of an event of default under the financing documents.
In the project's 2019 annual accounts, the auditor has noted a material uncertainty relating to going concern and noted that CNH's ability to continue as one depends on the continued financial support of its financing providers. While we do not think AGE intends to accelerate, in December 2019, the insurer enforced its rights to place the project into distribution lock-up until the agreement with the trust and other parties is fully finalized. However, this does not seem to be an incentive in achieving the desired outcome.
The downgrade reflects what we view as an increased risk of detrimental consequences to the project.
This includes a potential project's termination given the strained relationships between the parties, and debt acceleration. We will resolve the CreditWatch and affirm the rating upon evidence of an agreed-to head of terms.
The stable outlook on the long-term issue rating reflects the outlook on the rating on the bond insurer, AGE, and will move in line with any rating changes or outlook revisions on the insurer.
The CreditWatch negative placement on the SPUR reflects the risk of a further lowering of the SPUR if the agreement's heads of terms are not signed by October; and a multi-notch downgrade if the trust takes steps that demonstrate an elevated risk of the project agreement being terminated, including the application of warning notices or significant number of deductions. Resolving the CreditWatch placement is contingent on resolving performance issues and progressing toward the settlement agreement.