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Investing.com -- On Friday, Moody’s Ratings announced a downgrade of Endeavour SCH PLC’s underlying senior secured rating to A3 from A2. The rating applies to the GBP137.5 million index-linked bonds due in 2031 issued by the company. The outlook for the rating has been shifted from negative to stable.
The A1 backed senior secured rating, which has an unconditional and irrevocable guarantee by Assured Guaranty (NYSE:AGO) UK Limited (AGUK, A1 stable), remains unaffected by this rating action.
Moody’s explained the downgrade after conducting a comprehensive review of all credit ratings for Endeavour SCH PLC during a rating committee meeting. The downgrade reflects the agency’s view on the project’s exposure to risks associated with a material retained estate, ongoing plastic pipework replacement, leak remediation, and the presence of Reinforced Autoclaved Aerated Concrete (RAAC) material at the project site.
The agency also noted a progressive weakening in the Debt Service Coverage Ratios (DSCR) over time, due to the significantly back-ended debt service and lifecycle profiles. This resulted in a reduction in the company’s ability to withstand unexpected stress, and a rating positioning no longer commensurate with the previous A2 level.
The rating action also considered the growing systemic risk in the UK PFI hospital sector, including the increased likelihood of NHS Trusts adopting stricter payment mechanisms and a more challenging approach to relationships. This systemic risk is heightened across the sector due to NHS financial pressures, and more acute where Trust finances are under enhanced monitoring, and obligations under the Project Agreement exhibit elevated operational or lifecycle complexity.
Despite these challenges, Endeavour SCH PLC’s underlying A3 rating continues to benefit from the long-term Project Agreement (PA) with the South Tees Hospitals NHS Foundation Trust, successful operational performance of the project, a stable revenue stream, and a range of creditor protections included within the financing structure.
However, the rating is constrained by the growing systemic risk in the UK PFI hospital sector, the challenges associated with managing a high proportion of retained estate within the project, and the company’s high leverage.
The outlook remains stable, reflecting Moody’s expectation that operating performance will remain strong, while plastic pipework replacement and leak remediation, as well as removal of RAAC material at the project site, will proceed as planned.
Moody’s stated that upward pressure on the rating is not currently anticipated given the project’s characteristics in the context of the systemic risk in the UK PFI hospital sector. The rating could be downgraded if there is an increase in deductions, a degradation in operational performance, deterioration in relationships between project parties, or if lifecycle costs are materially above budget.
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