LONDON (S&P Global Ratings) May 21, 2020—S&P Global Ratings today took the rating actions listed above.
On July 13, 2007, U.K.-based special-purpose vehicle Keele Residential Funding PLC (KRF or ProjectCo), issued 137.45 million of 2.108% guaranteed index-linked secured bonds. Upon issuance, KRF redeemed its existing debt, leased all of the student accommodation located on the grounds of the University of Keele up to 2029 and entered into an agreement with the university to extend the lease from its expiry date to July 31, 2047 (the reversionary lease).
Under the lease, the university, as landlord, is responsible for performing refurbishment, repairs, renewals, and ongoing maintenance of the student accommodation. The university funds these obligations via payments received from KRF, the maintenance reserves it set aside on the financial close, and its own resources.
ProjectCo has appointed the university to let out its student accommodation, which generates a contractually defined rental income (base-case rental), and to collect the corresponding payments on its behalf. The university also pays a license fee entitling it to use the student accommodation to generate additional rental income, beyond the base-case rental, and to use the car parking facilities.
KRF services its debt from the rent collected from the student accommodation by the university on its behalf and the license fees due from the university.
- The senior debt is subject to an unconditional and irrevocable guarantee from monoline insurer AGE.
- The operating requirements are simple and operation and maintenance risk has been transferred to the university.
- A contractual framework supports the cash flows, protecting them from one-off market shocks.
- There is high demand for student places at the university.
- The SPUR is weak-linked to the credit quality of the University of Keele, the project's revenue counterparty.
- The university is exposed to short-term void risk and long-term student demand risk.
We are affirming the SPUR because the contractual arrangements with the university make this project resilient to downside stresses, including social distancing measures to combat COVID-19.
The contractual framework allows the project to receive payments from the university in line with the contractual schedule, even if the university has not yet received rent payments from students. If, at the end of the year, there is a shortfall in the rents received from students, a lock-up is triggered, suspending all payments to the university and leaving the respective funds in the project's retained rent account.
Operating costs for ProjectCo are more stable and predictable than peer projects because the university retains responsibility for cost items that peer projects typically take on.
These items include the assets' maintenance and life cycle costs. The university funds this obligation from the subordinated lease rental payments it receives from KRF, drawings made on the maintenance reserves, and from its own resources. ProjectCo's operating costs represent a small portion of its cash flows because maintenance and life cycle costs are borne by the university, which gives ProjectCo more flexibility over the cash expenses that it does retain.
Due to a prior error in the application of our Project Finance Operations Methodology, we previously excluded the final debt repayment period ADSCR, which was abnormally low.
The ADSCR was not excluded due to foreseeable operational reasons, which is a misapplication of our methodology.
The negative outlook on the SPUR reflects our view on Keele University's capacity and willingness to meet its financial commitments.
The outlook on the long-term issue rating on the debt is stable, mirroring the outlook on AGE.
We would lower the SPUR if we considered Keele University's capacity and willingness to meet its financial commitments had deteriorated. We could also lower the SPUR if the project became more exposed to occupancy and market rental risk, for example, because of a rise in the availability of high-quality alternative accommodation on or near the campus, without a commensurate increase in student intake to maintain an above-average student-to-room ratio.
We could also lower the SPUR if the project's cash flows became more volatile or if the project's liquidity came under pressure, threatening its ability to fully cover debt service. This could occur if, for example, the student population saw a large drop because the university's reputation and league table ranking had weakened dramatically.
We could revise the outlook on the SPUR to stable if our view of the university's capacity and willingness to meet its financial commitments improved. We see limited scope to raise SPUR at present.