DBRS Finalizes Its Rating of “A” on Plenary Health Bridgepoint LP

DBRS has today finalized its rating of “A” with a Stable trend on the $252 million Senior Amortizing Bond (Series A) issue of Plenary Health Bridgepoint LP (ProjectCo). ProjectCo is a special-purpose entity created by Plenary Group (Canada) Ltd (Plenary Group) and Innisfree PFI Fund III LP acting by its manager Innisfree Ltd to design, build, finance and maintain a new 472-bed hospital and refurbish the adjacent old Don Jail for administrative purposes under a 33.6-year Project Agreement (PA) with the Bridgepoint Hospital (BH or the Hospital), one of Ontario’s largest complex care institutions. Supporting the rating are the solid contractors retained by ProjectCo to undertake the construction and service phases of the project on its behalf, along with the comprehensive enhancement package provided under the design-build contract and the low credit risk of the counterparties responsible for the availability-based payments to ProjectCo, namely the Province of Ontario and the Hospital. However, the credit profile is constrained by the usual uncertainties pertaining to large, moderately complex construction projects and the high leverage carried by ProjectCo, which, although common among public-private partnerships with availability-based payments, limits financial flexibility.

The project encompasses a 43-month construction phase starting in August 2009 and a 30-year service phase commencing the day after substantial completion and ending in March 2043. ProjectCo has passed down on a back-to-back basis all of its construction responsibilities to PCL Constructors Canada Inc. (the DB Contractor), which has agreed to complete the work at a fixed price by March 3, 2013 – twelve months before the PA’s Longstop Date. A subsidiary of Canada’s largest general contractor, the DB Contractor plans to subcontract about 85% of the development and will secure its performance with a full guarantee from its parent, a 50% performance bond, Subguard coverage on all subcontractors and a 5% letter of credit. Furthermore, should an event of default occur under the Trust Indenture during the construction phase, ProjectCo would have access to an additional $12.6 million in contingent equity currently secured by a letter of credit. According to the review of the technical advisor, the work is of low to moderate complexity and no issue has been identified as potentially posing undue risk.

Johnson Controls LP (the Service Provider) will perform most hard facility management services over the 30-year service phase of the project, including routine and lifecycle maintenance and utilities management. The Service Provider is a subsidiary of Johnson Controls Inc., a global leader in the provision of building automation systems and controls. Ancillary functions like security and waste management will be subcontracted to other specialized parties, with ProjectCo only retaining responsibility for general management, retail space management, performance monitoring and the maintenance of certain insurances. The contract with the Service Provider mirrors the service specifications and the monthly payment mechanism set out under the PA, and passes down on a back-to-back basis payment indexation and deductions from BH for failure to meet standards. Overall, the service specifications are viewed as extensive but of moderate complexity, with payment deduction events considered fair and deductions generally expected to be relatively modest over the life of the project.

Typical of public-private partnerships, however, leverage will be relatively high despite plans to use the one-time Substantial Completion Payment of $225 million to repay $165.5 million in short-term bank debt and pay for certain items that would have otherwise required external financing. This is reflected in the senior debt-to-EBITDA ratio of nearly 10.0 times and the relatively low debt service coverage ratio of 1.22 times projected at the onset of the service phase. While acceptable in light of the expected stability of the availability-based payments to be collected throughout the term of the project, it will nonetheless limit ProjectCo’s ability to weather adverse shocks such as the replacement of the DB Contractor or the Service Provider at a significant premium. A six-month debt service reserve and the performance security provided by the Service Provider will afford a modest cushion against unforeseen events during the service phase.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The applicable methodology is Rating Canadian Public-Private Partnerships, which can be found on our website under Methodologies.

This is a Corporate (Public Finance) rating.