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

DBRS has today confirmed its rating of A (low) 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 (m2) hospital under a 34.3-year public-private partnership with the McGill University Health Centre (MUHC or the Hospital). The trend remains Stable although concerns are mounting with respect to the schedule slippage experienced in the project.

Significant progress has been made since the last rating update. Except for very heavy rains experienced on May 29, spring weather has generally been favourable, which has allowed work in the last three months to advance at a pace consistent with that assumed in the remedial plan. As of the date of this report, the design is 73% complete, the permit to connect to water services has been obtained, and consultations continue with the City of Montréal on the few minor permits left to obtain. Furthermore, the concrete structures for Blocks A, B, C, D and E reached completion in June, and concreting work on the two parking structures (Blocks F and G) is progressing as planned. Approximately 85% of the work to be subcontracted by the design-build contractor (DB Contractor) has been procured, with no material quality issues encountered to date. DBRS also notes that due to concerns related to the financial pressure faced by European banks, the senior construction facility and related swap agreements were recently amended to remove the four European lenders. The change resulted in a lower interest rate applicable to the facility and will enhance the stability of the financing source.

Nevertheless, overall progress remains materially behind plan at 35%, translating into a delay in excess of 16 weeks relative to the original schedule. This is up from 13 weeks a year ago. The erosion in the schedule since the start of the project primarily reflects the later-than-expected delivery of the site, unfavourable geotechnical conditions, changes to integrate the Shriner’s Hospital and delays from MUHC in responding to ProjectCo’s design submissions and selecting certain equipment and their suppliers. As a result, the Scheduled Global Substantial Completion Date of September 30, 2014, will not be achieved. Excluding potential relief from the various scope changes (Variations) still under negotiation with the Hospital, the DB Contractor anticipates substantial completion by January 5, 2015, on all Blocks except for Block E, which is now expected to be completed by March 4, 2015.

Some of the delay relates to Variations and will likely result in relief from MUHC. DBRS also takes comfort with the strategy used to limit slippage, including overtime during evenings and weekends, but is worried by the sizeable delay and the difficulties encountered by MUHC in finalizing its equipment needs. Under the contractual framework, any delay should be the responsibility of either the Hospital or the DB Contractor, since ProjectCo is not performing any of the work and has passed down all of its construction risks to the DB Contractor. Nevertheless, the sustained coordination issues encountered with the Hospital are somewhat unusual for PPP projects and are diverting considerable management resources. More importantly, these issues have the potential to cause friction, which could trigger disputes among the parties and add to the delay. DBRS is confident that there remains sufficient time to catch up, but notes that failure to materially reduce the delay by next year’s rating review could adversely affect the 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.