DBRS Assigns a Provisional Rating of A (low) to ITS SJHC Partnership

DBRS has today assigned a provisional rating of A (low) with a Stable trend to the proposed $212 million Series A Senior Bonds of Integrated Team Solutions SJHC Partnership (ProjectCo), the special-purpose entity created to design, build, finance and maintain two new mental-health facilities, in London and St. Thomas, Ontario, under the 32-year project agreement (PA) with St. Joseph’s Health Care London (SJHC or the Hospital). The rating is predicated in part on the strength of the construction contractor, which has been retained by ProjectCo to perform all design-build obligations, and its parent guarantor, EllisDon Inc., as well as on the limited complexity of the facilities relative to standard acute-care hospitals and the extent of the construction security package provided to ProjectCo. The A (low) rating also reflects a well-balanced service phase, characterized by a lighter-than-usual scope of service responsibilities entrusted to a high-quality service provider, partially guaranteed by Honeywell International Inc.; a reasonably tight lifecycle monitoring and reserving mechanism; and acceptable operating resilience.

The construction phase entails the design, construction and commissioning of a 454,025-square-foot regional mental-health facility adjacent to Parkwood Hospital in London and a 234,430-square-foot regional mental-health forensics facility in St. Thomas. Except for the funding risk related to certain supervening events, for which contingent funding sources have been secured, construction contractor will assume all risks and responsibilities pertaining to the project under two separate construction contracts, with a combined value of $374 million. Its performance will be backed by a parent guarantee for up to 50% of the contract prices, a 10% letter of credit and Subguard coverage on all subtrades, except for the formwork subcontractor, which will provide a 50% performance bond. Work on the St. Thomas facility will span a 26-month period, with substantial completion scheduled for April 24, 2013, which will mark the beginning of the 30-year service phase. Construction of the London facility will require 44 months, with substantial completion projected for October 27, 2014. The technical advisor views the project as being low complexity, although DBRS notes that running two sites concurrently and the proximity of the new London facility to the adjacent hospital will require careful planning.

Except for general management, which will be performed by the sponsors, all risks and responsibilities pertaining to core facility management (FM) and lifecycle maintenance will be undertaken by Honeywell Limited for the life of the project. DBRS notes that the service obligations are standard but exclude certain soft FM services generally passed down to the private sector, such as cleaning and security, resulting in a smaller operating budget. A guarantee from Honeywell International Inc. (rated “A” by DBRS) equal to 400% of the average annual service payment will support the performance of the Service Provider. Typical of public-private partnerships (PPPs), however, leverage will be high, with debt-to-cash flow available for debt servicing projected at 11.0 times in the first year of normalized operation and a standard debt service coverage ratio of 1.21 times foreseen over the project’s term. Break-even results are also tight, although they are within the benchmark range and balanced by the solid profile of the Service Provider, the straightforward nature of service responsibilities and the lifecycle review mechanism embedded in the contractual structure.

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.