Hospital Company (Dartford) Issuer Plc (The) -- Moody's downgrades the underlying rating of The Hospital Company (Dartford) Issuer Plc to A3 from A2; outlook changed to negative

Rating Action: Moody's downgrades the underlying rating of The Hospital Company (Dartford) Issuer Plc to A3 from A2; outlook changed to negativeGlobal Credit Research - 03 Mar 2022London, 03 March 2022 -- Moody's Investors Service ("Moody's") today downgraded the underlying rating to A3 from A2 on The Hospital Company (Dartford) Issuer Plc's (the Issuer) GBP152.5 million index-linked senior secured bonds (the Bonds) due 2031. The outlook was changed to negative from stable.The Issuer is the financing vehicle for The Hospital Company (Dartford) Limited (ProjectCo).RATINGS RATIONALEThe downgrade reflects (1) ProjectCo's projected long-term financial metrics have reduced and are now weaker than A2 rated peer projects; and (2) execution risk around various estate remedial works, some of which have unknown scope and cost.The A3 underlying rating reflects as credit strengths (1) ProjectCo's long-term private finance initiative (PFI) project agreement (PA) with the Dartford and Gravesham NHS Trust (the Trust) to build, finance, maintain and provide facilities management (FM) services to the Darent Valley Hospital; (2) the predictable and stable revenue stream under the PA; (3) satisfactory operating performance of the hospital, albeit the Trust has raised some performance issues; (4) the recent removal of soft FM services simplifies ProjectCo's operational obligations; and (5) creditor protections included within the financing structure.The A3 underlying rating also reflects the following credit weaknesses (1) projected financial metrics are weak relative to most comparable A2 rated UK PFI projects, (2) uncertainty around the extent of remedial works required following the fire and estate condition surveys and (3) risk around ProjectCo not completing remedial works by the stipulated dates and incurring additional financial deductions and performance score reductions.In November 2021, ProjectCo and the Trust signed a Settlement and Amendment Deed (the S&AD). Whilst this resolves some Trust claims about historic performance, ProjectCo must deliver various remedial works within a stipulated timeframe (which may be extended for certain delay events, for example arising from coronavirus or Trust access restrictions). The S&AD also requires ProjectCo to procure fire safety and site condition surveys, and to complete any identified remedial works. The extent of such works is currently unknown. Whilst ProjectCo has adequate liquidity to cover the currently expected rectification costs, if actual costs are higher it would place further stress on the company's short term liquidity.ProjectCo has budgeted around GBP6 million in remedial works (excluding fire safety and site condition) over 2022 and 2023. These will reduce the debt service cover ratios (DSCRs) below 1.0x for a number of upcoming calculation dates. Importantly, after the last debt payment date in October 2021, ProjectCo had around GBP4 million of free cash, which enables debt service to be paid without using the debt service reserve account (DSRA). The controlling creditor Assured Guaranty has agreed to reduce the financing document Event of Default DSCR covenants for 2022 and 2023 such that the remedial costs will not, in and of themselves, result in a financial ratio event of default.ProjectCo's projected financial metrics (after 2023 and therefore excluding the short term impact of remedial works) have slightly weakened because of the UK's planned corporation tax increase in 2023. Previously, metrics were already positioned weakly relative to similar A2 projects.RATIONALE FOR NEGATIVE OUTLOOKProjectCo faces the risk of delivering remedial works, including some with currently uncertain cost and difficulty. If the required remedial works are more expensive than expected it would place further stress upon ProjectCo's short term liquidity.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGThe rating could be upgraded if (1) ProjectCo satisfactorily completes all required remedial works and (2) ProjectCo's projected financial metrics improve such that DSCRs are above 1.25x on a sustained basis.The rating could be downgraded if (1) required fire safety and site condition remedial works are more significant than currently expected, or (2) ProjectCo experiences difficult in delivering remedial works and this leads to increased financial deductions or performance score reductions.The principal methodology used in this rating was Operational Privately Financed Public Infrastructure (PFI/PPP/P3) Projects Methodology published in June 2021 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1244911. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.REGULATORY DISCLOSURESFor further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. 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For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.The rating has been disclosed to the rated entity or its designated agent (s) and issued with no amendment resulting from that disclosure.This rating is solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288235.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating. Kunal Govindia Vice President - Senior Analyst Infrastructure Finance Group Moody's Investors Service Ltd. One Canada Square Canary Wharf London E14 5FA United Kingdom JOURNALISTS: 44 20 7772 5456 Client Service: 44 20 7772 5454 Kevin Maddick Associate Managing Director Infrastructure Finance Group JOURNALISTS: 44 20 7772 5456 Client Service: 44 20 7772 5454 Releasing Office: Moody's Investors Service Ltd. 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