DBRS Downgrades CSS (FSCC) Partnership to BBB (high) with a Stable Trend

DBRS Limited (DBRS) downgraded the rating of CSS (FSCC) Partnership’s (ProjectCo) Senior Secured Debt to BBB (high) with Stable Trend from A (low) and removed the rating from Under Review with Negative Implications. ProjectCo is the special-purpose entity contracted by Ontario Infrastructure and Lands Corporation (OILC) to design, build, finance and maintain a new 665,000-square foot Forensics Services and Coroner’s Complex (the Project) located in Toronto under a 32.5-year public-private partnership agreement.

The rating action results from the material deterioration in the credit profile of Carillion plc, which provides the guarantee supporting Carillion Services (FSCC) Inc.’s (the Service Provider) obligations under its Service Contract with ProjectCo. DBRS had placed the project Under Review with Negative Implications on July 28, 2017, pending the receipt of additional information after Carillion plc’s H1 2017 trading update outlined management’s reduced performance expectations, including a deterioration in cash flows on construction contracts, working capital outflows and an expected impairment provision of GBP 845 million, and the planned exit from certain geographic markets. Carillion plc released H1 2017 interim results on September 29, 2017, which indicated losses before taxation of GBP 1.1 billion and a 161% increase in net borrowing from December 31, 2016, to GBP 571 million. Carillion plc is undertaking actions to improve the cash flow position and strengthen the balance sheet. It expects proceeds from non-core business disposals of GBP 300 million and is in discussions regarding the sale of business in Canada and the U.K. health-care business.

After review of the additional disclosures made on September 29, 2017, DBRS no longer considers Carillion plc to have an investment-grade credit profile. As per DBRS’s methodology, the Project’s O&M and lifecycle resiliencies of 46.7% and 45.2%, respectively, now map to a BBB (high) rating when the service provider is considered to be non-investment grade.

As noted in DBRS’s press release of July 28, 2017, the Project has otherwise been performing well with no major operating concerns. During the first eight months of the year, failure points were well below warning notice thresholds. Deductions during the period were also low, except for in January 2017 when higher deductions were incurred that were attributable to elevator unavailability failures; however, these deductions were fully passed down to the Service Provider, and the issues have since been rectified. ProjectCo has indicated that the working relationship with OILC remains collaborative.

Further negative rating action could arise from material underperformance of the Service Provider, while positive rating action is considered unlikely over the near term. Over the longer term, a material increase in Carillion plc’s creditworthiness, coupled with good operating results at the Project, could lead to positive 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.

In the previous press release, the rating was mistakenly noted to be endorsed by DBRS Ratings Limited for use in the European Union. The rating is not endorsed for use in the European Union.

The rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.

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