OREANDA-NEWS. Fitch Ratings has affirmed Meridian Hospital Company Plc's (Meridian) GBP91.2m index-linked bonds due 2028 at 'BBB+' with a Positive Outlook and Derby Healthcare PLC's (DHC) GBP446.6m bonds, due 2041 at 'BBB' with a Stable Outlook.

The rating actions on the availability-based hospital project financings follow the recent publication of Fitch's revised 'Rating Criteria for Availability-Based Projects' on 14 October 2015. Fitch's actions on its North American portfolio are covered in a separate release.

The affirmations reflect Fitch's assessment of cost risk, realistic outside cost stresses, indicative debt service coverage ratio (DSCR) thresholds, breakeven cost analysis as well as completion risk where applicable.

KEY RATING DRIVERS
Meridian
The affirmation at 'BBB+' and Positive Outlook reflects Fitch's Midrange assessment of the project's exposure to cost risk under Fitch's revised availability criteria. The overall Midrange cost risk assessment is derived from Midrange assessments for scope risk and cost predictability and cost volatility reflecting the moderate complexity operation, maintenance, and lifecycle requirements with the ability to withstand financial stresses. In its financial analysis Fitch uses the sponsor's cost assumptions in absence of a detailed realistic outside cost (ROC) analysis prepared by an independent financial advisor.

In accordance with the criteria, Fitch has increased the base-case rating thresholds by 0.05x compared with the indicative DSCR coverage range for Midrange projects (1.15x-1.30x). Forecast average annual debt service cover ratios (ADSCR) are strong at 1.64x, but coverage remains close to the minimum of 1.34x prior to a significant step-up in the profile in 2019.

The Positive Outlook reflects Fitch's expectation of strengthening coverage of the project due to step-ups in DSCR in 2019 and 2024. At present, the metrics position the rating at the upper end of the applicable cover ratio range of 1.20-1.35x average DSCR.

The project further benefits from a robust all-cost break-even at 43%, which translates into a realistic outside ROC breakeven of over 16x using minimum ROC assumptions. The rating continues to be supported by a predictable payment mechanism, a strong regulatory framework for NHS creditors, appropriate risk pass-through to contractors and adequate structural provisions.

DHC
The affirmation at 'BBB' and Stable Outlook reflects Fitch's Midrange assessment of the project's exposure to cost risk under Fitch's revised availability criteria. The overall Midrange cost risk assessment is derived from Midrange assessments for scope risk and cost predictability and cost volatility reflecting the moderate complexity operation, maintenance, and lifecycle requirements with the ability to withstand financial stresses. In its financial analysis Fitch uses the sponsor's cost assumptions in absence of a detailed ROC analysis prepared by an independent financial advisor.

In accordance with the criteria, Fitch has increased the base-case rating thresholds by 0.05x compared with the indicative DSCR coverage range for Midrange projects (1.15x-1.30x). Forecast minimum and average ADSCR are 1.15x and 1.21x, respectively. These metrics are at the lower end of the applicable cover ratio range of 1.20-1.35x average DSCR. However, the all-cost break-even results are robust with 43%, which translates into a ROC breakeven of over 25x using minimum ROC assumptions.

The rating continues to be supported by a predictable payment mechanism, a strong regulatory framework for NHS creditors, appropriate risk pass-through to contractors and adequate structural provisions.