DBRS Finalizes Rating of “A” on Plenary Health Care Partnerships Humber LP, Trend Stable

DBRS has today finalized the rating of “A” with a Stable trend on the $482.389 million Short-Term Senior Bonds, the $375.340 million Series A Long-Term Senior Bonds, and the $148.713 million Series B Long-Term Senior Bonds (collectively, the Bonds) of Plenary Health Care Partnerships Humber LP (ProjectCo), which is the special-purpose entity created to design, build, finance and maintain a new 1.7 million square foot hospital facility in northwestern Toronto, Ontario, under a 33.63-year project agreement with Humber River Regional Hospital. The sizeable construction enhancement package combined with the credit profile of the construction contractor and the moderately low complexity of work result in a construction phase 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 DBRS standards, also make the service phase consistent with the rating.

The facility will be designed to be the first fully digital hospital in the region. It will be split into two components, including a three-storey structure and a 14-storey structure on separate points of the site. The facility will accommodate 656 beds and have two parking garages providing approximately 2,000 parking spaces in total. All design, construction and commissioning obligations have been passed down under a fixed-price date-certain contract valued at $974.8 million to PCL Constructors Canada Inc. (PCL or the Construction Contractor). The construction phase will start on September 23, 2011, and is scheduled to reach substantial completion on May 11, 2015, for a total duration of 43.5 months. Except for certain works related to information technology, the work is 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, there are no significant concerns related to the geotechnical conditions, and the schedule and budget are viewed as adequate by the technical advisor. The Construction Contractor has provided a letter of credit of 5% of the contract price and a parent guarantee of all obligations under the contract up to a limit of liability of 50% of the contract price from PCL Construction Group Inc. In addition, a performance bond in the amount of 50% of the Construction Contract price is being provided by PCL for the benefit of ProjectCo. Zurich Insurance Company of Canada Ltd., Travelers Guarantee Company of Canada and Chubb Insurance Company of Canada are jointly and severally liable under the performance bond. PCL has also committed to using its corporate Subguard insurance, as well as performance bonding for 50% of the contract price for major subcontractors that are not covered under the Subguard policy due to the value of the subcontract, including mechanical and electrical subcontracts. The resulting enhancement package, combined with PCL’s creditworthiness, is equal to others seen for reasonably straightforward construction projects rated in the “A”-range.

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, Johnson Controls LP (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 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, 18, and 21, which will reserve amounts in excess of $10.5 million as required in order to meet future lifecycle obligations.

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 11.8 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 for facility management costs are aggressive for the rating but viewed as adequate given the quality of the Service Provider and the greater stability in budgeting of facility management costs compared with lifecycle costs. Finally, the initial gearing ratio of 92.6% is also aggressive for “A”-rated transactions. However, the dollar amount of equity committed is significant, and the high initial leverage is mitigated by the strength of the Construction Contractor and the security package. Upon Substantial Completion, gearing falls to 86.7%.

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.