DBRS Confirms EllisDon Infrastructure JBH Inc. at A (low), Stable Trend

DBRS Limited (DBRS) confirmed the rating of A (low) with a Stable trend on the $185.8 million Series B Short Term Bonds issued by EllisDon Infrastructure JBH Inc. (ProjectCo), the special-purpose entity created to design, build and finance the construction of a new tower (the Tower) and refurbish portions of the existing hospital in Burlington, Ontario (the Project), under a 45-month Project Agreement (PA) with Joseph Brant Hospital (JBH or the Hospital). The rating assigned to the $137.7 million Series A Short Term Bonds was withdrawn on August 14, 2017, after full repayment on July 25, 2017, from proceeds of the Tower Interim Completion Payment.

As at the end of October 2017, the Project was in its 34th month of a 43-month schedule and 87.1% complete, as measured by the gross work completed, with the lag behind the scheduled drawdown curve at 0.4%, as compared with a peak of 10% in September 2016. Following Tower Interim Completion, patient move-in was completed on August 20, 2017, and ProjectCo is working on deferred items and minor deficiencies. The balance of renovation works, which include major renovations on the first two levels of the Hospital and minor renovations on the next four levels (levels three to six), started in August 2017.

ProjectCo is facing delays in completing the renovation works because of a number of items that remain in discussion with the Hospital. These include (1) a lag in the fire alarm upgrade as a result of technical migration issues, (2) the discovery of higher-than-envisaged amounts of certain contaminants during the course of the demolition works in September 2017 and October 2017 that required additional remediation and abatement and (3) unforeseen delamination of existing flooring surfaces. After resequencing certain activities, ProjectCo currently estimates a 45-workday delay mainly because of these items. The current works schedule indicates a substantial completion date of September 25, 2018, instead of August 20, 2018 (inclusive of the one-month JBH float). Approximately a quarter of the demolition work remains, and DBRS notes that the delays may increase if further contaminants are found. Per the PA, the Hospital is responsible for contamination that is not described or inferable from the survey reports, and any resulting variations are treated as a delay event and/or a compensation event.

DBRS notes that Tower Interim Completion was successfully achieved on July 17, 2017, and several earlier delays have been addressed with an updated schedule through a variation. ProjectCo has a number of ongoing disputes with the Hospital, although none of them currently affect the schedule. The Lenders’ Technical Advisor, Tuner & Townsend cm2r, has not noted any concerns in connection with the Leadership in Energy and Environmental Design status and has indicated that ProjectCo is on track to achieve the Project’s sustainability goals. ProjectCo maintains the security package, as required, without any draws on the liquid security.

The rating continues to be underpinned by the sound credit quality of the Construction Contractor and its parent company, a comprehensive security package and the relatively straightforward nature of the construction task. DBRS also views the stream of Completion Payments to be received from the Hospital to be low risk in nature. However, the rating is constrained by the typical uncertainties regarding construction adjacent to an existing operating hospital and the limited resources of ProjectCo to weather unexpected shocks. As there is no service phase, the A (low) rating has been assigned solely on the basis of the construction phase rating. Given the short longstop date of 180 days under the PA relative to other projects, DBRS will carefully monitor the progress of construction and of the negotiations with the Hospital. A negative rating action is a consideration if there are further material delays without adequate mitigation measures undertaken by ProjectCo or appropriate relief provided by the Hospital.

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

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

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 under Related Documents or by contacting us at info@dbrs.com.

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

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