DBRS Confirms SNC-Lavalin Innisfree McGill Finance Inc. Series A Amortizing Bonds at BBB (high), Positive

DBRS Limited (DBRS) has today confirmed the BBB (high) rating with a Positive trend on the Series A Senior Amortizing Bonds of SNC-Lavalin Innisfree McGill Finance Inc. (the Issuer), the financing vehicle unconditionally guaranteed by McGill Healthcare Infrastructure Group G.P. (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 (PPP) with the McGill University Health Centre (MUHC or the Hospital).

The rating confirmation reflects the achievement of Stage 1 and Stage 2 Substantial Completion with the Global Substantial Completion Certificate letter received on November 5, 2014. The overall construction progress, which included design, construction procurement and commissioning, reached 99.8% by November 5, 2014. All testing and commissioning activities required to achieve substantial completion have been completed. Some testing activities are still required in order to close out the remaining items on the minor deficiencies list, anticipated to be completed by the fall of 2015 with final completion expected by the end of the year. The outstanding construction work is relatively minor, including some mutually agreed upon construction scope that was delayed until after service period commencement. Approximately $4 million is currently being withheld from the construction period payments until this work is complete. In addition to this withholding, the 10% construction letter of credit remains in place. Remaining minor works are estimated at $1 million and include the rework of the ventilation system.

The achievement of Stage 1 Substantial Completion in 2014 marked the beginning of the 30-year service phase, during which ProjectCo’s responsibility for non-clinical operation, maintenance and rehabilitation, including the requirement to return the facility in a state of good repair upon expiry of the Project Agreement, have been passed down to SNC-Lavalin O&M Inc. and Johnson Controls. Delays in reaching Global Substantial completion have resulted in liquidated damages amounting to roughly $9.3 million. The transition to the service phase has been somewhat bumpy due to a short bedding-in period in the Partnership Agreement. Service period deductions have been estimated at $1.6 million up to June 2015 and are primarily due to ventilation system issues in the Research Institute. Negotiations are ongoing between MUHC and the Service Provider with respect to the challenges experienced in the first six months of operations including unavailability deductions and failure point accumulation. The Lenders’ Technical Advisor notes that these sorts of operational issues and resulting deductions are not uncommon in large and complex PPP accommodation projects, and while significant, are considered manageable for a project of this size and type. DBRS expects that once the construction related challenges have been resolved and the project is operating at a steady state with minimal deductions, further positive rating action could be taken. Forecasted DSCR is 1.36 times at the end of the first full year of operations and 1.38 times throughout the term of the service phase.

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 (September 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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