DBRS Finalizes Ratings of Plenary Properties LTAP at “A”

DBRS has finalized the ratings of “A” with Stable trends on the $167.5 million Short-Term Senior Bonds and the $839.6 million Long-Term Senior Bonds of Plenary Properties LTAP LP (ProjectCo). The credit profile incorporates well-balanced construction and operating phases that both exhibit characteristics consistent with an “A” rating. ProjectCo is the special-purpose entity created to design, build, finance, maintain and provide IT services to the Communications Security Establishment Canada (CSEC) Long-Term Accommodation Project (LTAP) under a 33.5-year project agreement with the Government of Canada (the Crown) as represented by Defence Construction Canada (1951) Ltd. The new facility, referred to as the LTAP facility, will consolidate all services currently provided at four separate locations by CSEC, Canada’s foreign intelligence and national cryptologic agency.

The project entails the design and construction of a multi-storey office and special-purpose building of approximately 893,000 square feet on Crown land in Ottawa, with an 800-car parking facility. ProjectCo is also tasked with monitoring the integration of the adjacent MTAP facility, which is being built by a third party, and delivering certain facility management (FM) services at that facility until completion of the LTAP facility, which is scheduled for July 31, 2014. ProjectCo has retained PCL Constructors Canada Inc. (DB Contractor), a subsidiary of PCL Construction Group Inc. (PCL), to assume all obligations pertaining to the 42-month construction phase under a fixed-price date-certain contract. The land is already owned by the Crown and the project’s permitting process benefits from the fact that it is a federal project, adding certainty to the schedule. Furthermore, the technical advisor notes that the design and construction obligations are standard and the construction phase is of low to moderate complexity. The project is large and the volume of mechanical, electrical, IT and security components is extensive, although these elements do not materially increase the overall complexity of the work. The personnel on site will be subject to stringent security requirements, which will require careful management and may reduce productivity and flexibility to reallocate workers, although the DB Contractor has indicated that it is familiar with such requirements and has planned accordingly.

To secure its performance, the DB Contractor has provided a 50% parent guarantee and a 5% letter of credit (LC) and will insure the performance of all its subcontractors with Subguard, except for mechanical and electrical subtrades, which will be bonded. The whole project will also be wrapped under a 50% performance bond. As per DBRS’s methodology, the significant expertise of the DB Contractor, the financial strength of its parent guarantor, the project’s moderate complexity and the notable lift provided by the construction enhancement package position the construction phase comfortably within the “A” category.

The 30-year operating phase formally begins at substantial completion of the LTAP facility, although partial FM services will start being delivered at the MTAP facility as early as November 1, 2011, until its full integration with the completed LTAP facility. Key service responsibilities include customary routine and lifecycle maintenance as well as fairly comprehensive IT and security services. Ancillary services such as helpdesk, energy consumption management and food services are also part of the scope of services.

All responsibilities pertaining to the facilities and their equipment have been passed down on a back-to-back basis to a subsidiary of Honeywell International Inc., under a fixed-price 30-year contract, including security services and the maintenance of the IT infrastructure extending from the data centre to the subfloor connections in employee cubicles. However, IT support, maintenance and lifecycle services will be undertaken by a subsidiary of Hewlett-Packard Company, under a separate fixed-price contract. Key IT obligations entail, among other things, hardware and software procurement and maintenance, incident response and helpdesk services. A fairly standard performance security package will be provided by each service provider. DBRS notes that the IT equipment is customary, the related service requirements are clearly outlined and the related lifecycle obligations mostly entail replacing equipment at set intervals. In addition, FM obligations are fairly straightforward. Nevertheless, the heavy IT and security requirements will require a significant redundancy in heating, ventilation and air-conditioning (HVAC) and power components, as well as a larger labour force and heavier lifecycle interventions. This results in higher operating and maintenance (O&M) and lifecycle budgets and a somewhat more complex operating phase than typical social accommodation public-private partnerships (PPPs). A tight facility condition-monitoring process, which includes reviews every five years and mandatory provisioning if material deficiencies are identified in the lifecycle budget in years 15, 20, 23 or 26 of the operating phase, will help mitigate these risks.

At approximately 10.4 times cash flow available for debt servicing in year 1 of operation, leverage will be high during the operating phase, albeit consistent with other “A”-range availability-based PPPs. The debt service coverage ratio also reflects this situation and is projected to stand at 1.23 times, translating into limited financial flexibility. However, the passing down of operating obligations and risks to two solid, very experienced contractors and the performance security packages provided will help cushion ProjectCo against unforeseen shocks. Also contributing to ProjectCo’s stability are the three-year look-forward major maintenance reserve to be maintained over the life of the project, the lifecycle monitoring and reserving mechanisms and the benchmarking of all IT payments and a material portion of O&M payments, which reduces the risk generally resulting from pricing services for a 30-year period. The results of DBRS’s break-even analysis are also adequate, resulting in overall operating resilience that is consistent with an “A” rating.

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.