DBRS Finalizes Rating of A (low) on Hospital Infrastructure Partners (NOH) Partnership

DBRS has today finalized its provisional rating of A (low) with a Stable trend on the $543.5 million Series A Senior Secured Bonds of Hospital Infrastructure Partners (NOH) Partnership (ProjectCo), which is the special-purpose entity created to design, build, finance and maintain a new 1.8 million square foot hospital facility in Oakville, Ontario, under the 34-year project agreement (PA) with Halton Healthcare Services Corporation. Lower-than-expected financing rates secured by ProjectCo have led to debt amounts, service payment stream and breakeven analysis results somewhat lower than originally projected, although financial metrics remain well within the ranges adequate for the rating. The sizeable construction enhancement package combined with the profile of the construction joint venture and the moderately low complexity of work result in a construction phase strongly within the rating category while the low credit risk related to ProjectCo revenues, the straightforward nature of the service obligations and ProjectCo’s operating resilience, in line with standards, make the service phase consistent with the rating.

The facility will have four wings of four to seven storeys and will accommodate 457 beds, with approximately 2,000 parking spaces provided partly through a six-storey structure. All design, construction and commissioning obligations have been passed down under a fixed-price contract valued at $975.7 million to a joint venture of EllisDon Corporation and Carillion Construction Inc. (the Construction Contractor), except for the funding risk related to certain supervening events, which has been addressed through an increase in the bank facility. The construction phase will start on July 29, 2011, and reach substantial completion on July 31, 2015, for a total duration of 48 months. The large scale of the facility is viewed by DBRS as the most challenging aspect of the construction phase and will require considerable planning and tight management of trades material flow and the schedule. The other aspects of the work are typical for a hospital project, keeping the complexity of the construction phase well within the low to moderate range. In particular, the techniques required for the project are standard, geotechnical conditions are favourable, the schedule and budget are viewed as adequate by the technical advisor and the greenfield site entails no demolition work. Furthermore, a sizeable performance security package will help mitigate the risks pertaining to construction, including a joint and several parent guarantee for up to 50% of the contract price, a 10% letter of credit and Subguard coverage on all subtrades, except for the formwork subcontractor, which will provide a 100% performance bond.

Similar to the construction phase, all risks and responsibilities pertaining to core facility management and lifecycle maintenance will be assumed by an experienced service provider owned by Carillion Canada Inc. and EllisDon Corporation (the Service Provider) for the full 30-year term of the service phase, with the exception of general management which will be performed by the sponsors. The scope of services required under the PA is standard and includes preventive and lifecycle maintenance of the facility and certain equipment, plant services, energy consumption management, helpdesk services and grounds maintenance. A joint and several parent guarantee of 150% of the annual base payment (excluding lifecycle payments) for all liabilities except lifecycle and of 50% of the unexpended lifecycle budget for all lifecycle liabilities, along with a modest letter of credit, will support the performance of the Service Provider.

Nonetheless, leverage will be high during the service phase, which is standard for a public-private partnership. This is reflected in the debt-to-cash flow available for debt servicing ratio of 11.3 times projected in the first year of operation and the debt service coverage ratio of 1.25 times foreseen over the project’s term. The results of the breakeven analysis are also tight but viewed as adequate for the rating given the quality of the Service Provider, the customary scope of service obligations and the protection provided by the lifecycle monitoring mechanism, which requires facility inspections every two years starting in Year 5 of the service phase and reserving for any deficiency exceeding 7.5% of the remaining lifecycle budget identified in Years 15 or 20 of 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.