DBRS Confirms Health Montréal Collective Limited Partnership at BBB, Stable Trend

DBRS Limited (DBRS) has today confirmed the BBB rating on the Senior Secured Bonds of Health Montréal Collective Limited Partnership/Collectif Santé Montréal S.E.C. (ProjectCo). The trend on the rating is unchanged from Stable. ProjectCo is the special-purpose entity created to design, build, finance and maintain a new 772-bed health-care facility under a 38.8-year public-private partnership (PPP) with the Centre hospitalier de l’Université de Montréal (CHUM or the Hospital), as evidenced by the Project Agreement (PA). ProjectCo’s design, construction and commissioning obligations have been passed down to affiliates of LOR and Obrascón Huarte Lain, S.A. (collectively, the Construction Contractor).

The confirmation of the rating is primarily because of the achievement of Phase 1 substantial completion on March 31, 2017, which has been certified by the Independent Certifier, Mott MacDonald, and the current value of the performance support versus the construction obligations remaining. Construction progress was delayed by inclement weather, the slow pace of design work and equipment procurement, an industry-wide strike and Variation Directives issued by the Hospital, which, in some cases, required redesign and reconstruction; however, the primary buildings, including Blocks D, B1 and A’, are now complete, approximately 11 months after the target date. Furthermore, all Variation Directives have been completed and paid for with the exception of two Variation Directives relating to changes to the equipment list. Some deferred works and commissioning activities remain, and ProjectCo has begun clinical commissioning activities, which will be completed over the next six months. Once clinical commissioning is complete, the transfer of equipment and non-priority furniture will begin, allowing the patients from Hôpital Saint-Luc to be transferred, followed by the demolition work scheduled to commence in Autumn 2017. The demolition of Hôpital Saint-Luc will commence once CHUM has issued the St-Luc certification that it is safe to do so and is estimated to be complete a year from commencement. The Phase 2 target substantial completion date has been revised to May 2021 from March 2020, a postponement of 14 months caused by the delays for Phase 1 completion outlined above. DBRS notes that, in most cases, if an event of default related to the construction tasks during Phase 2 occurs and leads to termination, the termination payment from CHUM will be sufficient to pay the senior debt amount such that bondholders are made whole, which isolates bondholders from construction risk during Phase 2.

At the time of the initial rating assignment, DBRS conducted internal assessments of the creditworthiness of the Construction Contractor parties and their parents and selected LOR, based on its relative credit strength, as a starting point for determining ProjectCo’s rating during construction. At financial close, each Construction Contractor’s respective parent provided a solidary performance guarantee — equivalent to a joint and several guarantee under English common law — that covers all of the Construction Contractor’s obligations under the Construction Contract to an aggregate limit of 50% of the contract price, with construction work valued at $1.99 billion. Since financial close, DBRS’s internal assessment of the creditworthiness of LOR has declined, partially because of weaker financial performance linked to material losses incurred on ProjectCo and others and because LOR reported substantial operating losses and negative cash flow for the fiscal year ended March 31, 2016. While the credit value of LOR’s parent guarantee has been negatively affected by LOR’s weaker financial performance, this deterioration is compensated for by incremental project liquid security, including letters of credit for 25% of the Phase 2 construction price, the performance bond and structured retention, which remains available for use in the event of a contractor replacement. As a result, the value of the Phase 2 performance security is viewed as robust by DBRS. LOR’s weaker financial performance is also mitigated to the extent that Phase 1 substantial completion has been achieved, representing more than 80% of the overall project cost, with the remaining roughly 20% of the project works representing demolition and non-clinical structure work.

The 33.0-year service phase commenced upon achievement of Phase 1 substantial completion and entails routine maintenance of the primary facilities, including plant services, help desk services, grounds maintenance and systems infrastructure security as well as lifecycle maintenance in order to return the facility to the Hospital in a state of good repair upon the expiry of the PA. Except for some insurance-, management- and financial-reporting responsibilities, all of ProjectCo’s obligations related to the service phase have been subcontracted to Veolia Health Operating Services Montreal L.P. (Veolia). The project marks the first time that Veolia has been selected as a service provider for a Canadian PPP, but the provision of facilities management (FM) and rehabilitation services is a core competency of Veolia, which has over 70 years of experience in the area of FM and energy services. DBRS notes that timely completion of clinical commissioning activities along with a smooth transition of responsibilities among the project stakeholders (without occurrence of material performance-related issues for at least six months) could lead DBRS to consider a positive rating action, whereas project delays in the completion of commissioning and transitioning could trigger a negative rating action.

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.

The principal methodology is Rating Public-Private Partnerships, which can be found on dbrs.com 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.