DBRS Confirms CSS (FSCC) Partnership at BBB (high), Stable Trend

DBRS Limited (DBRS) confirmed the rating of BBB (high) with a Stable trend on the $190.3 million Senior Secured Bonds (the Bonds) of CSS (FSCC) Partnership (ProjectCo). ProjectCo is the special-purpose entity (SPE) created to design, build, finance and maintain a new approximately 665,000 square foot (sq. ft.) Forensics Services and Coroner’s Complex (the Project) under a 32.5-year public-private partnership (PPP) with Ontario Infrastructure and Lands Corporation (OILC; formerly known as Infrastructure Ontario (IO)).

DBRS Limited (DBRS) downgraded the rating on October 10, 2017, as a result of material deterioration in the credit profile of Carillion plc (the Service Guarantor), which provides the guarantee supporting Carillion Services (FSCC) Inc.’s (the Service Provider) obligations under its service contract with ProjectCo (the Service Contract). DBRS no longer considers Carillion plc to have an investment-grade credit profile and, as per DBRS’s methodology, the Project’s operating and maintenance (O&M) and lifecycle resiliencies of 46.7% and 45.2%, respectively, is considered acceptable at a BBB (high) rating when the Service Provider is considered to be non-investment grade.

Carillion plc had expected to be in breach of financial covenants as of December 31, 2017, although the test date has been deferred to April 30, 2018, with the consent of the lenders. The company is in discussions regarding recapitalization/restructuring of its balance sheet and expects to provide additional clarity in Q1 2018. As per the financing documents for the Project, insolvency of the Service Guarantor (which includes an inability to pay debts, though not only a breach of the covenants) or the termination of the Service Contract as a result of default of the Service Guarantor is an event of default, with a 30-day cure period. If Carillion plc becomes insolvent, DBRS expects ProjectCo would take steps as is necessary to continue provision of O&M and lifecycle services, which could include replacement within the cure period to avoid a default. If such a scenario occurs, the impact on the rating would be dependent on the resulting financial metrics and the credit profile of the new Service Provider (or the Service Guarantor) being investment grade or not, as well as the timeliness of replacement of the Service Guarantor.

The Project has otherwise been performing well with no major operating concerns. The achievement of Substantial Completion on February 15, 2013, marked the commencement of the 30-year service phase, entailing routine maintenance of the facility and its electromechanical equipment as well as management of energy consumption and lifecycle maintenance to return the facility to OILC in a state of good repair upon expiry of the Project Agreement (PA). Final completion was achieved on May 26, 2016. ProjectCo indicates that Carillion Services (FSCC) Inc. has been operating the facility in line with expectations. Availability payments have been steady, with only nominal deductions. During the first 11 months of 2017, service deductions totalled $81,420, the majority of which were caused by elevator unavailability failures in January 2017 as part of normal operations. Although higher than the deductions incurred in the previous year, DBRS nonetheless considers the deduction levels to be relatively low. The failure points, totalling 374 for the last 12 months ending November 2017, were significantly below the threshold for warning or monitoring notices. DBRS does not expect any significant changes in facility operations for the upcoming year and believes that operations will continue in a good state, also noting the downward trend in the number of failures.

ProjectCo indicated that the Service Provider and OILC maintain a good working relationship and continue to meet on a monthly basis to discuss operational issues. Minimum/equity lock-up debt service coverage ratio (DSCR) projections of 1.25 times (x) and 1.15x, respectively, are maintained. A six-month debt service reserve and the performance security provided by the Service Provider will afford a modest cushion against unforeseen events during the service phase. DBRS notes that a prolonged period of operational difficulties or a need to replace the Service Provider could place negative pressure on the rating. Positive rating action is considered unlikely at this time.

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.

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