OREANDA-NEWS. S&P Global Ratings today revised to positive from stable its outlook on the senior secured debt issued by the U. K.-based special-purpose vehicle Healthcare Support (North Staffs) Finance PLC (ProjectCo). The debt comprises ?190.0 million of index-linked guaranteed senior secured bonds (including ?33.0 million of variation bonds) due 2043; and a ?154.6 million European Investment Bank (AAA/Stable/A-1+) senior secured index-linked loan due 2039. At the same time, we affirmed our 'BBB-' issue ratings on the senior secured debt.

The senior secured debt retains an unconditional and irrevocable guarantee provided by MBIA U. K. Insurance Ltd. (BB/Stable/--) of payment of scheduled interest and principal. Under our criteria, a rating on a monoline-insured debt issue reflects the higher of the rating on the monoline and S&P Global Ratings' underlying rating (SPUR). The long-term issue ratings on the bonds therefore reflect the SPUR.

The outlook revision reflects our view that relations between the various parties have improved significantly and that there has been a reduction in the level of performance deductions imposed on the soft facility management (FM) service provider, which in the past have been in excess of the warning notice threshold. Furthermore, all outstanding disputes between the Trust and the project parties have been resolved, including the legacy temperature-control issue and the dispute resolution with respect to the Retail Price Index (RPI) increment date.

Once we believe that the current soft FM performance level is sustainable, reflected by low level of performance deductions, and the project party relationships have stabilized following another year of operational track record, we would raise the rating.

The relationship between the various parties has improved significantly, largely due to the appointment of a new general manager in December 2015, who has experience managing Private Finance Initiative (PFI) projects. We believe this has helped to turn around the project's performance.

We have also seen a reduction in the level of performance deductions imposed on the soft FM service provider, Sodexo, which in the past were in excess of the warning notice threshold. These deductions were due to the poor performance in cleaning and portering services, which have now reduced substantially. That said, in July 2016, portering service failure points (SFPs) once again began to increase, but we understand that Sodexo is taking steps to address this issue. Once the FM provider is able to demonstrate sustainable performance, resulting in lower SFPs, we would raise the issue rating.

A tripartite letter to resolve and close the legacy temperature-control issue arising from high temperatures experienced in parts of the city general building during periods of particularly hot weather in 2013 has also been agreed and we expect the Trust to sign this imminently. This letter indicates a confirmation from the Trust on the remediation works carried out by the construction contractor after which the Trust will not be able to revisit any temperature issues arising in these areas.

The dispute resolution process with regard to the RPI increment date that went to an arbitration process has been settled and closed in June 2016. A one-off payment of ?0.5 million from ProjectCo to the Trust, taken out of the ?1.0 million retention payment held by the Trust since August 2014 resolves the issue. This, we believe, will have no financial impact on the project's debt service cover ratios (DSCRs).

The positive outlook reflects the improving relationship between all project parties and the resolution of all outstanding disputes between the Trust and the project parties. Furthermore, the project has seen a material reduction in the level of performance deductions imposed on the soft FM service provider, which in the past have been in excess of the warning notice threshold.

The FM service provider will need to demonstrate that its current performance level is sustainable before we raise the rating. At this point, we would lower our operations phase business risk assessment of the project and increase the rating by at least one notch, assuming that there is no material deterioration in the project's financial performance.

We could revise the outlook to stable or lower the rating if the operational performance were to weaken and service performance deductions were to increase to historically high levels, or if the annual DSCRs, calculated in accordance with our criteria, were to fall materially below 1.10x.