DBRS Confirms Health Montreal Collective at BBB (high), Stable Trend

DBRS Limited (DBRS) has today confirmed the BBB (high) rating on the $1,371 million Senior Secured Bonds (the Bonds) of Health Montréal Collective Limited Partnership/Collectif Santé Montréal S.E.C. (ProjectCo). ProjectCo is the special-purpose entity created to design, build, finance and maintain a new 772-bed health-care facility (the Project) under a 38.8-year public-private partnership with the Centre Hospitalier de l’Université de Montréal (CHUM or the Hospital) as evidenced by the Project Agreement (PA). While the trend is Stable, DBRS is concerned that Phase 1 may not be achieved prior to the target date of April 22, 2016.

ProjectCo’s design, construction and commissioning obligations have been passed down to the Construction Contractor, comprising affiliates of Laing O’Rourke Corporation Limited and Obrascón Huarte Lain S.A. Construction is behind schedule and, as measured by funds disbursed, the works are approximately 50.7% complete compared with the scheduled completion of about 60.4%. Inclement weather, the slow pace of design work and issues surrounding the acceptance of variations have translated into delays. In response, the Construction Contractor has initiated certain mitigation measures, including doubling planned monthly activities, although short-term gains may be modest given the fewer number of tasks scheduled during winter. ProjectCo has also submitted several delay notices detailing that the pace of design has been negatively affected by slow response times, which remain under consideration by the Hospital. The Lenders’ Technical Advisor (LTA) provided by BTY Group has noted that the pace of incurrence of delays has slowed and that the estimated progress of the works is approximately five weeks behind the critical path, although overall progress is lagging by 22 weeks; however, this remains well within the Longstop Date under the PA.

Notwithstanding the construction delays and the outstanding claims between the Hospital and ProjectCo, there is a continued collaborative effort to resolve these issues. Items requiring the Hospital’s involvement are progressing and there is a common motivation to work through all outstanding items to complete the Project by its scheduled completion date. Should negotiations be resolved in a timely fashion, the LTA expects that the target substantial completion date can still be achieved. DBRS will continue to monitor construction progress and notes that rating action could be possible in the event that construction delays materially worsen or if the relationship between ProjectCo and the Hospital markedly deteriorates.

Upon completion of Phase 1, the 33.8-year service phase will commence, entailing routine and lifecycle maintenance of the facility, the provision of help desk services, grounds maintenance, pest control and security. ProjectCo’s obligations related to the service phase will be passed down to Dalkia Health Services Montréal L.P. Financial projections for the service phase remain consistent with the original financial model and adequate for the rating.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

The applicable methodology is Rating Public-Private Partnerships (March 2015), which can be found on our website under Methodologies.

The full report providing additional analytical detail is available by clicking on the link under Related
Research at the right of the screen or by contacting us at info@dbrs.com.

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