(The following statement was released by the rating agency)LONDON, May 15 (Fitch) Fitch Ratings has downgraded Theatre (Hospitals) No. 1 Plc's and Theatre (Hospitals) No. 2 Plc's class C notes and affirmed the class D notes. The Outlooks are Negative. A full list of rating actions is at the end of this release.KEY RATING DRIVERSThe downgrade of the class C notes reflects Fitch's opinion that the likelihood of their default is relatively closely aligned with that of the class D notes. This is due to the uniqueness and illiquid nature of the securitised property portfolio, which hence may be subject to material fluctuations of realisable market value.The affirmation of the class D notes predominantly reflects the improvement in the notes' loan-to-value ratios (driven by a bottoming out in the tenant's financial performance, minor principal amortisation and the reduction in negative mark-to-market (MtM) of the interest rate swaps to around GBP460m from GBP575m last year). Fitch considers a consensual restructuring now more likely although enforcement and a forced sale is a possibility given the complexity of the transaction's structure and large number of parties involved, particularly if the restructuring negotiations become more protracted. The Negative Outlooks reflect Fitch's limited insight into the tenant's (opco) operating performance combined with the uncertainty of the outcome of the restructuring process with a forced sale still being a possibility. This is further exacerbated by the complexity of the transaction structure (with multiple issuers and layers of creditors, large scale of operations and high levels of debt).Since the last review, BMI Healthcare's (BMI; the opco) performance appears to have flattened out with trailing 12 month (TTM) December 2013 EBITDAHR increasing by 0.5% to GBP197.7m. The first increase after several years of decline results from higher revenues but the ongoing rising operating costs (notably in medical fees) have further compressed margins to approximately 31%. Fitch expects that in line with improving UK economic conditions, the opco's performance might continue to show signs of stabilisation. However, annual rent increases of 2.5% will probably put the opco's cash flow under pressure and might not be sustainable over the longer term.The underlying propco loan was due on 15 October 2013 but the relevant transaction parties agreed to a series of short-term extensions of the loan maturity date, currently until 15 July 2014 to enable restructuring negotiations to continue.Fitch notes that the indicative terms of the current restructuring proposal (as published by the master servicer) include a partial prepayment of senior debt from the proceeds of a new subordinated loan ranking ahead of junior loans, a five-year extension of loan final maturity date, restructuring of the existing hedging arrangements, increased margins on senior loans, allocation of surplus cash flows towards repayment of senior loans and amendments of the existing junior loans, including accrual of interest on junior loans. However, details of this proposal remain unknown at this stage.Fitch would expect that during the long-term extension, the transactions could benefit from the recovering UK economy, a clearer outlook regarding healthcare reforms and potentially reduced MtM on the swaps if interest rates were to rise again.Fitch's revised base case assumes the opco's performance will flatten out, with EBITDAHR fluctuating around GBP197m driven by the UK's improving macroeconomic environment, employment market and probably also disposable income.Fitch's implied market value of the properties at the end of the short-term extension in July 2014 remains broadly stable at around GBP1.3bn (based on EBITDAHR rent cover of 1.8x and blended net yield of 8.0%). Together with the decrease in swap MtM to around GBP460m (GBP575m last year) and the partial amortisation of the senior loan after the payments to the junior lenders have been switched off contributed to an improvement in projected LTVs (including swap MtM) to 94% from 109% and to 104% from 119% for the class C and D notes, respectively, compared with our forecast at the time of the last review. However, Fitch notes that a number of valuation parameters are deemed quite volatile, making material changes in LTVs likely. Furthermore, realisable asset values in a forced sale scenario may be significantly below Fitch's implied market value.Without the MtM, Fitch's LTVs are at more comfortable levels of 59% and 68%, respectively. Nevertheless, Fitch believes the continued deterioration of the opco's EBITDHAR rent cover to around 1.53x in 2013 (from 1.8x in 2009) remains a risk. RATING SENSITIVITIESIf the transactions are restructured in a way that is deemed detrimental (e.g. crystallisation of  the MtM of the swaps) or a forced sale of the properties occurs, then the ratings of the class C and D notes are likely to be downgraded further. The ratings could also be downgraded if the opco's performance deteriorates, for example if despite the improving UK economic outlook, the PMIs and self-pay revenues were further curtailed or the opco was able to re-negotiate the currently paid rent.The transactions are securitisations of loans to property-owning entities (the propco) secured on 35 private hospitals operated by BMI, the acute private hospital division of General Healthcare Group (GHG). The propco's principal source of repayment under the term loan is the net rent received under leases payable by tenants operating within BMI. BMI is the largest independent provider of private patient care in the UK, operating a total of 72 hospitals with over 3,000 beds. Both issuers are identical in structure and their notes rank equally within one another.The ratings actions are as follows:Theatre (Hospitals) No.1 plc:GBP49.3m class C notes: downgraded to 'B+' from 'BB'; Outlook NegativeGBP49.3m class D notes: affirmed at 'B'; Outlook NegativeTheatre (Hospitals) No.2 plc:GBP32.9m class C notes: downgraded to 'B+' from 'BB'; Outlook NegativeGBP32.9m class D notes: affirmed at 'B'; Outlook NegativeContact: Primary AnalystRadim RadkovskyAssociate Director+44 20 3530 1254Fitch Ratings Limited 30 North ColonnadeLondon E14 5GNSecondary AnalystGeorge AbbattAnalyst+44 20 3530 1576Committee ChairpersonDan RobertsonManaging Director+44 20 3530 1312Media Relations: Francoise Alos, Paris, Tel: +33 1 44 29 91 22, Email: francoise.alos@fitchratings.com.Additional information is available on 
  www.fitchratings.com
 Applicable criteria, 'Rating Criteria for Infrastructure and Project Finance' dated 11 July 2012, 'Rating Criteria for UK Whole Business Securitisations', dated 09 August 2012, and 'EMEA CMBS Rating Criteria' dated 3 April 2013, and are available at 
  www.fitchratings.com.
 Applicable Criteria and Related Research:  EMEA CMBS Rating Criteria 
  http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=704358
 Rating Criteria for Infrastructure and Project Finance
  http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=682867
 Rating Criteria for UK Whole Business Securitisations
  http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685496
 Additional Disclosure Solicitation Status 
  http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=830304
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