Moody’s has upgraded the rating outlook on Royal Women’s Hospital (RWH) from negative to stable, which is positive for its nominal and indexed annuity bondholders. We believe RWH’s credit rating could be upgraded if the nominal bonds are successfully refinanced
Moody's has improved the outlook on Royal Women’s Hospital’s (RWH) senior secured rating from negative to stable, and at the same time has affirmed the investment grade Baa2 rating. The outlook upgrade has been driven by the rating agency’s view that the refinancing risk on the nominal bonds in 2017 is manageable. The owners of RWH, BBGI, are highly incentivised to inject additional capital to support the full refinancing of the nominal bonds in 2017 as the equity capital injection needed to support the refinancing is materially below the future value of dividends which BBGI could earn if they allow the project to continue until the end of the project term in 2033.
Previously, Moody’s has indicated that it would continue to downgrade the RWH credit rating until such time as the project owners provide a plan for the refinancing, so the positive revision to the rating outlook represents a change from their previous statements.
BBGI has stated that it will actively seek to refinance where it results in a value uplift to the project. Also noted are BBGI's existing liquidity resources and the strategic importance of Australia to its expanding infrastructure portfolio.
The news is positive for both the nominal and indexed annuity bondholders, as it reaffirms the likelihood that the current owners of the project will inject additional capital to support the full refinancing of the nominal bonds in 2017. However, Moody’s has stated that it does not believe that credit margins will improve enough to allow refinancing of the nominal bonds without additional equity support. So, the current rating is reliant on the project owners supporting the refinancing of the project. Please note at this stage BBGI has not made a public statement around its intention to support the RWH refinancing and so at this stage the credit opinion is based on the expectation they will provide equity support to the refinancing given the incentives in place to do so.
The improvement in rating outlook reaffirms FIIG Research’s view that the nominal bonds are likely to be refinanced at the 2017 call date given the incentives for BBGI to keep the project running and earn dividends from the asset until the end of the project term in 2033. While the current senior secured rating on RWH is currently Baa2 with a stable outlook, we expect the rating would be upgraded to an ‘A’ rating once there is certainty around the refinancing.
BBGI SICAV S.A. (‘BBGI’)
BBGI is a closed-ended investment company incorporated in Luxembourg, listed on the London Stock Exchange. BBGI has a portfolio consisting of 36 infrastructure assets diversified by geography and sector across availability-based road projects and a range of social infrastructure projects in the UK, continental Europe, Canada, Australia and the USA. BBGI is the 100% owner of RWH.
In July 2015, BBGI completed the acquisition of a further 50% interest in the Northern Territory Secure Facilities PPP Project in Australia bringing its total equity interest holding to 100%. This is positive for RWH as it indicates the fund is increasing its commitment to the Australian market.
At 16 November 2015, the company had net debt of approximately £26.0 million, 5.5% of the net asset value as calculated at 30 June 2015, after taking account of approximately £19.2 million of currently available cash.
In terms of liquidity, BBGI also has a three year revolving credit facility of £80 million in place. As at 16 November 2015, the amount utilised under the credit facility was £69.7 million, of which £24.5 million is being used to cover letters of credit and the remaining £45.2 million is drawn to provide bridge financing for acquisitions. BBGI retains the flexibility to consider larger transactions by virtue of having structured a further £100 million incremental accordion tranche, for which no commitment fees are paid, which provides the possibility of allowing the company to increase the facility to £180 million. We expect BBGI will have sufficient liquidity under the revolving credit facility to fund the required equity capital to support the refinancing of the RWH nominal bonds in 2017.
How have the bonds performed since the news?
Yields on the RWH bonds have rallied by between 10-20bps on the rating outlook upgrade but we still believe they represent good relative value given the stable Baa2 investment grade rating. The RWH Finance nominal and indexed annuity bonds are currently offered at indicative yields of 6.2% and 3.6% (real) respectively. Please note the yield on the nominal bond is to the 2017 call date on the expectation the bonds will be called. Both bonds are available to wholesale clients only.
Please contact your FIIG representative for further information on the RWH bonds.