DBRS Finalizes Rating of “A” on Plenary Health Hamilton LP

DBRS has today finalized the ratings of “A” with a Stable trend to the $255 million Long Term Senior Bonds (Long Term Bonds) and the $115 million Short Term Senior Bonds (Short Term Bonds) of Plenary Health Hamilton LP (ProjectCo). ProjectCo is the special-purpose entity created to design, build, finance and maintain a new approximately 830,000 square foot, 305-bed mental health care facility under a 33-year public-private partnership (PPP) with St. Joseph’s Healthcare Hamilton (SJHH or the Hospital).

Supporting the ratings are superior contractors retained by ProjectCo to undertake the construction of the new hospital, decommissioning and demolition of the existing hospital, and perform the non-clinical services for ProjectCo, as well as comprehensive enhancement packages provided under the Construction and Service Contracts. The low credit risk of the counterparties providing the availability-based payments to ProjectCo, namely the Province of Ontario and the Hospital, are also positive considerations. Nevertheless, the credit profile is constrained by the usual uncertainties related to construction projects and the limited ability of the builder to self-perform the project. While 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 or construction difficulties, also limits the ratings.

ProjectCo will pass down the construction tasks and the majority of risks to PCL Constructors Canada Inc. (the Construction Contractor) under a fixed-price date-certain contract valued at $337 million. There will be two phased completion dates, with the Phase 1A completion date of December 6, 2013 corresponding to the completion of the facility and the Phase 1B completion date of August 29, 2014 corresponding to the demolition of the existing facilities and the completion of the remaining works. Spanning approximately 36 months, construction of Phase 1A will start in January, 2011. The structure will have three storeys above grade and a single-storey basement. The Construction Contractor has provided a letter of credit of 5% of the contract price and a parent guarantee of 50% of the contract price from PCL Construction Group Inc., as well as a performance bond equal to 50% of the contract price which may also be used to pay LDs. PCL has also committed to using its corporate Subguard insurance, as well as performance bonding for 50% of the contract price for major subcontractors with contract values greater than $25 million, including mechanical and electrical (M&E) subcontracts, that are not covered under the Subguard policy. The resulting enhancement package, combined with PCL’s creditworthiness, is superior to others seen for reasonably straightforward construction projects in the A-range. DBRS notes that the construction task is of low to moderate complexity, well within PCL’s capabilities, and that PCL has previous experience working with the Hospital on other construction projects.

In the event that the target substantial completion date is exceeded, the short-term debt will convert to a floating instrument with a maturity date after the longstop date in the Project Agreement (PA). The 30-year service phase will commence upon substantial completion and entails routine and lifecycle maintenance of the facility and electromechanical equipment, as well as management of energy consumption and lifecycle maintenance in order to return the facility to the Hospital upon expiry of the PA in a state of good repair, commensurate to its age. Services such as help desk services, grounds maintenance and general management services are also within the scope of the project.

Except for general management and insurance responsibilities, all of ProjectCo’s obligations related to the services 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 output requirements are clearly specified and reasonable and the performance penalties are adequately sized for the severity of the failure. The project also features a comprehensive means of addressing lifecycle obligations, including look-forward inspections at years 15, 19, and 22 which will reserve amounts in excess of $5 million as required in order to meet future lifecycle obligations.

With all service responsibilities transferred to a highly skilled subcontractor and revenues originating from creditworthy public sector counterparties, 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. During the first year of operations, debt-to-cash flow available for debt servicing will stand at just 11.2 times with a minimum DSCR of 1.22 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. The relatively large Substantial Completion Payment in relation to the amount of debt in the permanent capital structure further reduces the ability of the financing structure to withstand material budget changes during the service phase to the low end of the range for the rating. Nevertheless, DBRS takes comfort from Honeywell’s track record on similar and related projects and the sound approach taken for dealing with life cycle responsibilities, which mitigates this risk to a degree.

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.