High-profile PFI project hit by downgrade

Rating agency Standard & Poor’s (S&P) has downgraded bonds issued by RMPA Services (RPMA), the project company behind the UK’s Colchester Garrison Ministry of Defence project, to ‘BB+’ from ‘BBB-‘.

The news follows an announcement by rival agency Moody’s earlier this month that it was placing on review for downgrade the ‘A2’ rating it has assigned to RPMA’s £679.9 million (€972 million; $1.1 billion) senior secured bonds due 2038. These include £100 million of variation bonds that were not drawn and were subsequently cancelled as they were no longer required.

The redevelopment of Colchester Garrison, budgeted at about £2 billion, is one of the largest defence accommodation Private Finance Initiative (PFI) projects to date. In February, HICL Infrastructure Company and InfraRed Infrastructure Yield Fund, two funds managed by UK-based InfraRed Capital Partners, exited their combined 69 percent stake in the scheme to Germany’s Allianz, the PPP Equity PIP fund and Dalmore Capital Fund II for £139 million.

Both S&P and Moody’s believe RPMA’s recent sale of corporate tax losses to its previous shareholders, against a payment £13.7 million that the company partly distributed to its new owners, will cause its future corporate tax payments to be larger than previously forecast, resulting in a lower debt coverage ratio.

S&P also notes that RPMA distributed the savings from reduced subordinated debt interest payments, which it says will lead to an earlier tax liability. “The downgrade reflects our view that [the project company] will pursue a more aggressive financial policy,” it said in a research paper explaining its decision.

Both agencies continue to underline the long-term PFI contract between RPMA and the Ministry of Defence, stable availability-based revenue streams, the credit strength of the Ministry, the project's track record of good operating performance, satisfactory creditor protection arrangements and their expectations of high recovery for lenders in the event of default as strengths behind RPMA’s financial profile.

The company’s rating, Moody’s said, is however constrained by the project’s high leverage, which reduces its resilience in case of unexpected stress, and the absence of soft facility management benchmarking, which “typically mitigates against longer-term cost escalation risk.”

S&P, deeming a further downgrade unlikely in the near-term, said its rating outlook was “stable”. But it cautioned against future slides in RPMA’s credit metrics. “We could also lower the rating if the continued distribution of unspent life cycle funds were to weaken the project's liquidity or if the project's ADSCRs were to reduce due to higher taxes that cannot now be offset following the early sale of tax losses.”

Credit photo: Sir Robert McAlpine