DBRS Confirms BBB Ratings on Health Montréal Collective Limited Partnership/Collectif Santé Montréal S.E.C.; Ratings Remain Under Review with Negative Implications

DBRS confirmed the BBB Issuer Rating and the BBB rating on the Senior Secured Bonds issued by Health Montréal Collective Limited Partnership/Collectif Santé Montréal S.E.C. (ProjectCo). The ratings remain Under Review with Negative Implications. ProjectCo is the special-purpose entity created to design, build, finance and maintain a new 772-bed health-care facility (the Project) under a 38.8-year public-private partnership with the Centre Hospitalier de l’Université de Montréal (CHUM or the Hospital), as provided for in the Project Agreement (PA).

While the Senior Secured Bonds were previously placed Under Review with Negative Implications on June 27, 2018 (and the Issuer Rating on November 15, 2018, when it was assigned), DBRS notes that on November 22, 2018, correspondence was received from CHUM requesting that ProjectCo take all necessary actions to replace the Phase 1 Constructor or risk termination of the PA. The Phase 1 Constructor is a Construction Joint Venture (CJV) consisting of affiliates of Laing O’Rourke Corporation Limited and Obrascon Huarte Lain S.A., and is responsible for the design, construction and commissioning of Phase 1 of the Project. Substantial completion of Phase 1 occurred on March 31, 2017, although final completion of Phase 1 has not occurred, pending completion of certain outstanding deferred works items. The CJV has provided a revised schedule to complete the remaining deferred works and some disputed items by fall 2019 and has secured certification of the TR-2 deferred work milestone on October 31, 2018.

However, in the correspondence dated November 22, 2018, CHUM noted its frustration regarding the lack of timely completion of the deferred works and that the revised schedule submitted by the CJV provides little assurance that the CJV is capable of completing the remaining Phase 1 works in the stated timeframe. The Hospital has indicated that a plan for replacing the Phase 1 Constructor is to be submitted within seven days of the date of the letter and failure to comply will result in CHUM taking the necessary steps to terminate the PA.

Discussions between ProjectCo and CHUM are underway to develop a transition plan to transfer the obligations of the Phase 1 Constructor to a capable replacement party. A step-in arrangement is also being considered to avoid termination of the PA. However, DBRS notes that if the Hospital were to terminate the PA under most of the scenarios contemplated, there is a sixty-day cure period and discussions have already occurred with two other contractors being considered as replacements.

The remaining deferred works include the commissioning of systems and closing of non-conformities, valued at roughly $25 million, and aside from the cooling plant upgrade, are assessed to be of relatively low complexity. The remaining deferred works is scheduled to be completed by Q3 2019, originally expected to be finished by October 2017. DBRS notes that there is an ample amount of liquid security in place in the form of the Phase 1 letter of credit of $76 million to cover the remaining value of the deferred works, and so long as these works are contracted to a capable counterparty, DBRS does not envision further negative rating action should timely replacement occur. However, despite the relatively straightforward nature of these obligations, DBRS notes that the relationship with the Hospital remains strained and the timeframe to replace the CJV is very short.

On June 27, 2018, DBRS placed the rating Under Review with Negative Implications, stemming from CHUM having reported an alleged breach of PA obligations by ProjectCo, triggering a ProjectCo Event of Default under the provisions of the PA with regards to the environmental conditions of the Facility and the capacity of the cooling system. In addition to the alleged breach of PA obligations, the Hospital takes the view that ProjectCo has accumulated a number of service-period failure points that have resulted in multiple warning notices, notices of remedial rights and an initial and final notice of persistent breach that, if not remedied, could trigger an event of default and a termination of the PA. Such events and notices are disputed in good faith by ProjectCo.

DBRS notes that clinical operations of the Hospital are continuing and while discussions are ongoing, CHUM has suspended the alleged accumulation of failure points and further accumulation while remedial activities are being performed. The Under Review with Negative Implications status is maintained as DBRS remains concerned that the persistent and forceful correspondence between the Hospital and ProjectCo may have long-lasting effects on the contractual relationship, which may have a material impact on ProjectCo’s performance and financial metrics going forward. DBRS will closely monitor the service performance and development of the CJV replacement in the coming weeks. Full settlement of the issues surrounding the environmental conditions of the Facility and the capacity of the cooling system may not be known until the change of the seasons around Q1 and Q2 2019. Hence, further negative rating action could result if commercial and contractual discussions regarding performance and remediation steps deteriorate or continue to persist by the end of Q1 2019, if the event of default persists for a prolonged period or in the event that further legal action is taken by CHUM. The successful negotiation of commercial and contractual discussions, a sustained improvement in the relationship between the Hospital and ProjectCo and a period of good service performance could favourably conclude the review.

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 under Related Documents 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.

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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