DBRS Confirms SNC-Lavalin Innisfree McGill Finance Inc. at A (low)

DBRS has today confirmed its rating of A (low) with a Stable trend on the Series A Senior Amortizing Bonds of SNC-Lavalin Innisfree McGill Finance Inc. (the Issuer), the financing vehicle unconditionally guaranteed by Groupe immobilier santé McGill S.E.N.C. (ProjectCo) and its general partners. ProjectCo is the special-purpose vehicle responsible for the design, construction, financing and maintenance of a new 217,500 square metre hospital under a 34.3-year public-private partnership with the McGill University Health Centre (MUHC). The project has accumulated thirteen weeks of delay relative to the original schedule but DBRS remains confident that proactive management and the action plan put forward by the design-build contractor (DB Contactor) will be sufficient to deliver the health complex by the original Scheduled Substantial Completion Date of September 30, 2014.

Weather conditions have been uncooperative so far this year, with precipitation levels notably above historical trends, but the delay on the project is mainly attributable to other factors. These include later-than-expected execution of the Early Works Agreement, geotechnical conditions less favourable than initially foreseen and a design process that has been impaired by last-minute changes in project specifications and delays in obtaining MUHC’s response to ProjectCo’s design submissions.

The DB Contractor reacted promptly to the challenges and implemented a remedial plan to mitigate erosion in the project schedule. Overtime has been added through evening shifts and work weeks have been extended into the weekends at the expense of the DB Contractor. Additional piling rigs were brought to the site and piling and capping activities now overlap instead of running sequentially. Furthermore, the commissioning plan has been re-sequenced and optimized, which will also generate substantial time savings. As a result, the project’s substantial completion date remains unchanged. Nevertheless, DBRS notes that ongoing discussions with MUHC and the Province of Québec (the Province) with respect to the future location and integration of the new adjacent Shriners hospital may delay substantial completion. ProjectCo currently estimates the potential impact on the schedule at 45 days, although any material changes would be expected to result in a Variation with adequate compensation to ProjectCo. A detailed submission has been provided to MUHC and the Province.

Based on the latest technical advisor’s report (April 2011), 11.8% of the project had been completed, including 86% of excavation, 83% of the piling work and 36% of the design. ProjectCo also confirmed that contracts for about 80% of the subcontracted work have been awarded and that all trades were performing well. Upon completion of the 51-month construction phase, the service phase will get underway with the delivery of a relatively standard range of O&M services by SNC-Lavalin Operations and Maintenance. Johnson Controls L.P. will assume responsibility for the lifecycle maintenance of the more technical elements of the facilities such as electrical and mechanical components under a fixed-price contract while the balance of lifecycle obligations (37% of the real lifecycle budget) remains with ProjectCo. The financial projections for the service phase remain consistent with the original financial model and adequate for the rating.

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.