DBRS Finalizes its Rating of A (low) on Accès Recherche Montréal L.P.

DBRS has today finalized its rating of A (low) with a Stable trend to the $59.7 million short-term and $334.1 million long-term senior secured bond issues completed today by Accès Recherche Montréal L.P. (ProjectCo). ProjectCo is the special-purpose entity created by Fiera-Axium Recherche L.P. and Meridiam Infrastructure (SCA) SICAR to design, build, finance and maintain a new 68,431 square metre research centre under a 33.3-year public-private partnership (PPP) with the Centre Hospitalier de l’Université de Montréal (CHUM or the Hospital), one of Québec’s largest health care institutions.

The rating is predicated on the pass-down of all construction risks and responsibilities to a team of highly experienced Québec builders along with the limited complexity of the project and the robust performance security package provided to ProjectCo. The very strong profile of the contractor retained to perform all services during the 30-year service phase and the relatively low credit risk of the counterparties responsible for the availability-based payments to ProjectCo, namely the Province of Québec and the Hospital, also contribute strongly to the rating. Nevertheless, the credit profile is constrained by the usual uncertainties related to large construction projects and the limited size of the builders. Although typical of PPPs, the high leverage to be carried by ProjectCo over the life of the project and the limited resources available to ProjectCo to weather unexpected shocks, such as a service provider replacement, also limit the rating.

Spanning approximately 40 months, the construction phase will start in late May 2010 and consists of a 15-storey research and training facility, a six-storey administrative building and a bridge connecting the second floors of both buildings, with delivery scheduled for September 30, 2013. The work will be undertaken by a 50/50 joint venture consisting of Pomerleau and Verreault (the DBJV), two of Québec’s largest construction companies, under a fixed-price date-certain contract valued at $425 million. The partners are jointly and severally liable under the DB Agreement and have provided a letter of credit of 10% of the contract price and parent performance guarantees for the full value of the contract as security for their performance. Additional liquid support of 5% of the contract price is also available through a deeply-subordinated facility provided by the project sponsors, resulting in an enhancement package superior to that of most other Canadian PPPs bond-financed in recent years. The Technical Advisor (TA) notes that the project requirements are clear, geotechnical conditions are favourable and the design is well advanced. In addition, the construction phasing appears logical and budget contingencies provide a reasonable cushion. The demolition of an existing structure and the presence of a highway and metro line underneath the site will require special attention, but the TA takes comfort in the significant experience of the DBJV.

The 30-year service phase will commence upon substantial completion and entails routine and lifecycle maintenance of the facility and eletromechanical equipment (excluding clinical equipment), as well as management of energy consumption and lifecycle maintenance in order to return of the facility to CHUM upon expiry of the Project Agreement (PA) in a state of good repair. Ancillary services such as help desk services, ground maintenance, pest control and security services are also within the scope of the project. Except for general management and insurance responsibilities, all of ProjectCo’s obligations related to the service phase have been subcontracted for the term of the project to Honeywell Limited (the Service Provider), which has considerable experience with clinical PPPs and lifecycle maintenance. The contract mirrors the relevant sections of the PA, including the performance standards and payment mechanism, and holds the Service Provider accountable for service failure penalties, unless caused by ProjectCo. The output requirements are clearly defined and reasonable and the performance penalties are adequately sized for the severity of the failures.

With all service responsibilities transferred to a highly skilled subcontractor and revenues originating from public sector counterparties with sound credit profiles, ProjectCo should benefit from a relatively stable operating profile. Typical of PPPs, however, leverage will be high at the onset of the service phase despite the repayment of the short-term bonds upon receipt of the Substantial Completion Payment. Debt-to-cash-flow-available-for-debt-servicing (CFADS) will stand at nearly 9 times while the DSCR will hover around 1.37 times over the term of the project. Since most of ProjectCo’s revenues will be fixed for the life of the project, this leaves limited ability to sustain unexpected shocks. Nonetheless, DBRS’s break-even analysis still points to above-average resilience to material budget changes during the service phase.

Note:
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.