DBRS Downgrades Plenary Health Care Partnerships Humber LP to A (low), Maintains Negative Trend

DBRS Limited (DBRS) downgraded its ratings on the Series A and Series B Long-Term Senior Bonds issued by Plenary Health Care Partnerships Humber LP (ProjectCo) to A (low) from “A” and maintained the trends as Negative. 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 (PA) with Humber River Regional Hospital (HRRH or the Hospital). The rating action stems from sustained operational challenges faced by the Project; issuance of a second monitoring notice on November 6, 2018; persistent deduction-related disputes with HRRH; and delay in achieving resolution to outstanding disputes – indicative of some strain in the relationship with the Hospital as compared with other public-private partnership (PPP) projects in the rating category.

In the last annual review in February 2018, DBRS raised concerns about the deteriorating operating environment and the $1.9 million deductions applied by HRRH in October and November 2017 resulting from a prolonged elevator failure and referral of the matter to dispute resolution. In June 2018, HRRH deducted another $1.5 million for elevator downtime in March and April 2018. DBRS understands that the earlier dispute is pending resolution due to delay in finalizing the adjudicators by both parties. The June 2018 deductions have been included in the dispute, raising the amount of disputed deductions to approximately $3.4 million. Furthermore, final completion has been substantially delayed because of disagreements with HRRH over the settlement offer for construction-related works and variation payments. This matter is currently under dispute resolution and has been referred to the Independent Certifier.

The Project is now in the fourth year of its 30-year service phase after achieving substantial completion on May 11, 2015, and has continued to face sustained operational challenges, evident in the high level of accumulated failure points. The Project breached the warning notice threshold for the Plant Services and Utilities Management (P&U) category in July 2018, followed by a breach of monitoring notice threshold in subsequent months. On November 6, 2018, HRRH served a monitoring notice to ProjectCo for exceeding the three-month rolling failure point threshold for the months of July, August and September 2018 under the P&U category. DBRS notes that earlier a monitoring notice was also served in September 2016 and the six-month rolling threshold wherein HRRH could have forced the replacement of Johnson Controls Canada LP (JCCLP or the Service Provider) was breached during 2017. For the P&U category, accumulated failure points on a six-month rolling basis to September 2018 were roughly 86% of the threshold for replacement of Service Provider. In a scenario where this threshold is breached again, and the right of replacement is exercised by HRRH, ProjectCo would be required to step in to self-perform the responsibilities or bring in a replacement (which could come at a premium and cause a financial impact on ProjectCo).

On August 7, 2018, a short yet heavy rainfall caused flooding that affected multiple floors and functional units, including clinical areas. ProjectCo has informed DBRS that restoration of affected areas was completed in mid-September and deductions of around $3.9 million were self-reported for August 2018. DBRS understands that ProjectCo is in the process of requesting relief from HRRH under Section 40 of the PA for the combined deductions of August and September 2018 related to the flood event. DBRS awaits further details on this issue and will continue to monitor the situation.

DBRS notes that accumulated failure points remain below the default thresholds and deductions related to the service phase have been fully passed down to the Service Provider without causing financial impact to ProjectCo. However, recurring instance of the Hospital serving monitoring notice and frequent spikes in failure points are not representative of the steady state of operations that DBRS expects from projects in the “A” rating range. The Negative trend is maintained as DBRS remains concerned about the increase in the quantum of deductions referred to dispute resolution, the number issues pending resolution and the deterioration in service performance. DBRS will continue to closely monitor the service performance and developments relating to elevator and flood events. DBRS could take further negative rating action if the deterioration in service performance continues, high levels of failure points or deductions persist, the operating environment worsens as a result of disputes with the Hospital or any other material adverse development. DBRS could reinstate the Stable trend if ProjectCo and the Service Provider are able to achieve a steady state of operations with a sustained period of low level of deductions and failure points, along with timely resolution of disputes with 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.

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