Ratings agency Moody’s has downgraded to Baa3 from Baa2 the underlying ratings on £31.5m of senior secured fixed-rate bonds and £31.5m of senior secured index-linked amortizing bonds due 2048 issued by Holyrood Student Accommodation.
The bonds, which are backed by Assured Guaranty, underpin the 50-year contract signed in 2013 that sees Balfour Beatty build, finance, maintain and operate student accommodation on behalf of the University of Edinburgh.
“The weaker metrics are the result of a 5% cap on certain elements of the project agreement’s rent setting mechanism which limits ProjectCo’s ability to increase rents in line with current inflation levels,” Moody’s said.
The rooms are marketed a year in advance of the start of each academic year, and rents are based on retail price index indexation in the previous year. This means there is a one-year lag for the project company, which is having a significant impact this year given the major rise in inflation over the past 12 months.
Furthermore, Moody’s warned that Debt Service Coverage Ratios are forecast to remain below the lock-up threshold from 2023 until 2028 and that the project company “has little headroom to accommodate downside scenarios reflecting higher and more volatile RPI and energy costs that may lead to a breach of the Event of Default trigger level”.