DBRS Changes Trend on Plenary Health Care Partnerships Humber LP to Negative from Stable, Confirms Ratings at “A”

DBRS Limited (DBRS) confirmed the ratings on the Series A Long-Term Senior Bonds and the Series B Long-Term Senior Bonds of Plenary Health Care Partnerships Humber LP (ProjectCo) at “A”; however, the trends have been changed to Negative from Stable. ProjectCo is a special-purpose vehicle created to design, build, finance and maintain a new 1.7 million-square-foot hospital facility (the Project) in northwestern Toronto under a 33.6-year project agreement with Humber River Regional Hospital (HRRH or the Hospital). The trend change to Negative is primarily attributable to the delay in achieving a steady state of operation, subsistence of the monitoring notice served in September 2016, sustained accumulation of failure points and deductions and unresolved disputes with the Hospital that could lead to negative developments.

The Project achieved substantial completion on the target date of May 11, 2015. Final completion has been substantially delayed pending settlement of disagreements with the Hospital over deferred works, deficiencies and payments for variations. ProjectCo has indicated that it is working with the Hospital to settle the matters related to the construction phase by Q1 2018 when it intends to apply for the final completion certificate.

The Project is in its 32nd month of the 30-year service phase, during which Johnson Controls LP (JCLP or the Service Provider) performs all facilities management (FM) services on behalf of ProjectCo, including lifecycle obligations. The Project has faced operational challenges since 2016, accumulating a relatively high level of deductions and failure points. Exceedance of thresholds for warning and monitoring notices led to the delivery of a monitoring notice by HRRH in September 2016. To address the items raised in the monitoring notice, ProjectCo implemented a rectification plan outlining adherence to response times and normalization of operations. Subsequently, a temporary decline in failure points was reported toward the end of 2016. Further, there had been significant variation in the number of failure points and deductions reported by the Service Provider compared with that calculated by the Hospital during 2016. Substantial failure points and deductions continued to be awarded during 2017, with failure points persisting at high levels for most of 2017. The threshold where the Hospital can force replacement of the Service Provider had been breached for the Plant Services and Utilities Management category. ProjectCo has informed DBRS that the Hospital did not exercise its right to force the replacement of the Service Provider. The subcontractor responsible for providing the FM services exited the contract in April 2017.

After a three-month transition period, JCLP took over all responsibilities relating to FM (including Plant Services and Utilities Management) from the departed subcontractor starting August 2017 and implemented a plan to stabilize the operations. While ProjectCo reported a gradual decline in the number of failure points and deductions since August 2017, the amount of deductions calculated by HRRH spiked significantly during October and November 2017 — well in excess of levels reported by ProjectCo — due to a difference in the classification of a protracted elevator event. The matter is currently under dispute and is being taken to adjudication. DBRS notes that the accumulated failure points still remain below the default thresholds and the deductions related to the service phase have been fully passed down to the Service Provider without causing financial impact to ProjectCo.

Furthermore, ProjectCo has indicated that there could be some painshare during the first energy year that began in September 2017 as a result of an approximate 75% increase in natural gas consumption vis-à-vis targets. Several operational initiatives are being taken to reduce energy consumption, which include installation of light-emitting diode (LED) lighting in select areas and optimizing the sequencing for chillers and boilers. The Service Provider has also undertaken replacement of the communication software used by nurses to reduce future operational costs, resulting in higher-than-expected lifecycle expenditure for the initial years. However, DBRS notes that any variation in actual lifecycle expenditure along with painshare adjustments for energy consumption will be passed down to the Service Provider and will be excluded from the Service Provider’s liability cap.

Notwithstanding, DBRS remains concerned regarding the notable deterioration of the operating environment and the frequent revisions of the failure points and deductions. DBRS will continue to closely monitor the operational performance. DBRS could take a negative rating action if the material deterioration in service performance continues, the high levels of failure points or ongoing disputes persist and/or should any other material adverse development occur. While the characteristics of the Project limit the potential for a rating upgrade, DBRS could re-instate the Stable trend if ProjectCo and the Service Provider are able to effectively address the ongoing operational concerns with a low level of deductions and the timely resolution of pending disputes with the Hospital.

Financial projections for the service phase remain consistent with the financial model and are adequate for the rating since the deductions have been passed down by ProjectCo. The minimum debt service coverage ratio (DSCR) of 1.25 times (x) and equity lock-up DSCR of 1.15x are typically seen for availability-based public-private partnership (PPP) projects in the “A” range. Further, the FM resiliency of 49% and lifecycle resiliency of 59% are supportive of the ratings. A six-month debt service reserve and a relatively strong security package provided by the Service Provider provide a modest cushion against unforeseen events during the service phase.

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.