Morningstar DBRS Confirms Women's College Partnership at "A" With Stable Trends

DBRS Limited (Morningstar DBRS) confirmed Women's College Partnership's (ProjectCo) Issuer Rating and the rating on the $207.3 million Senior Secured Bonds (the Bonds) at "A" with Stable trends. ProjectCo is the special-purpose entity created for the design, construction, financing, maintenance, and rehabilitation of Women's College Hospital (the Project) in Toronto under a Project Agreement (PA) with Women's College Hospital (the Hospital) for a term of 30 years from scheduled interim completion.

The Project achieved interim completion on May 14, 2013, substantial completion on September 24, 2015, and final completion on April 4, 2019. The 30-year operating phase began on the achievement of interim completion. ProjectCo has subcontracted its operating and maintenance (O&M) responsibilities under the PA to Black & McDonald Ltd. (BML or the Service Provider) under a fixed-price, full-term service contract.

KEY CREDIT RATING CONSIDERATIONS
The ratings confirmation stems from the Project's stable operating and financial performance with minimal incurrence of failure points and deductions in 2023. The Project's operating performance in 2023 improved compared with 2022 as evidenced by the total number of failure points and total deductions that were about 79% and 69% below the levels in 2022, respectively. Morningstar DBRS notes that most of the failure points incurred in 2023 were relatively minor and related to elevator outages. Moreover, the total number of failures points recorded in 2023 were well below the contractual failure points thresholds. In Q1 2024, the Project maintained its stable operating performance without incurring any failure points during this period.

Lifecycle works performed to date had been relatively modest without any material deviations to the lifecycle cost profile based on the financial model at financial close. Because of the better-than-expected asset conditions, some of the lifecycle works that were initially planned for 2014 — 23 were deferred to future years. Morningstar DBRS notes that the accumulated deferred lifecycle amount is relatively modest and the deferred lifecycle activities are not considered to be critical works. Furthermore, ProjectCo confirmed that the lifecycle payments for those deferred lifecycle works remains available.

ProjectCo anticipates the lifecycle activities in 2024 will increase as compared with 2023. At this time, ProjectCo expects the total lifecycle cost in 2024 will be around $2.0 million. It includes some of the lifecycle activities that are carried over from 2023. These activities are primarily related to exhaust fans and elevator rope replacement and only account for approximately 15% of the projected total lifecycle cost in 2024. ProjectCo anticipates lifecycle cost to average about $2.0 million annually in 2025-28.

ProjectCo also indicated that the Project's actual annual energy consumption in 2023 was below the annual energy target; thus, BML received an energy gainshare amount from the Hospital.

CREDIT RATING DRIVERS
A positive credit rating action is unlikely because ProjectCo is not expected to materially outperform its financial projection on a sustained basis based on the contractual structure of the agreements with the Hospital and the Service Provider. Morningstar DBRS could take a negative credit rating action if ProjectCo incurs significant failure points as a result of a material deterioration in its operating performance. Furthermore, a persistently higher-than-expected lifecycle cost may result in a material deterioration of the financial metrics, which may lead to a negative credit rating action.

FINANCIAL OUTLOOK
For the year ended December 2023, the debt service coverage ratio (DSCR) of 1.49 times (x) was above the projected DSCR of 1.45x. The higher-than-expected DSCR was primarily related to higher-than-expected interest income.

The Project's minimum DSCR of 1.44x, coupled with O&M resilience of 83.9% and lifecycle resilience of 76.5%, remains supportive of the "A" ratings.

CREDIT RATING RATIONALE
The credit ratings are underpinned by the following strengths: (1) complexities associated with maintenance are generally fewer than those typically associated with an acute-care facility; and (2) an early look-forward lifecycle assessment of the Project that will require ProjectCo to fund any lifecycle deficit amount through the cashflow waterfall. Conversely, ProjectCo is exposed to lifecycle risk such that if there is an unexpected material increase in lifecycle cost that exceeds the available lifecycle payment and lifecycle reserve amount, this could potentially erode the financial resiliencies of the Project materially. However, Morningstar DBRS notes that the presence of a look-forward lifecycle assessment mechanism partially mitigates this risk.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS

Environmental (E) Factors
There were no Environmental factors that had a relevant or significant effect on the credit analysis.

Social (S) Factors
There were no Social factors that had a relevant or significant effect on the credit analysis.

Governance (G) Factors
There were no Governance factors that had a relevant or significant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (23 January 2024) https://dbrs.morningstar.com/research/427030/morningstar-dbrs-criteria:-approach-to-environmental,-social,-and-governance-risk-factors-in-credit-ratings.

RATING DRIVERS AND FINANCIAL RISK ASSESSMENT (FRA)

A) Weighting of Rating Driver Factors
In the analysis of Women's College Partnership, the relative weighting of the Rating Driver factors listed in the methodology was approximately equal.

B) Weighting of FRA Factors
In the analysis of Women's College Partnership, the following FRA factor in the availability-based section of the methodology was considered more important: O&M/Lifecycle Break-Even Ratios.

C) Weighting of the Rating Driver and the FRA
In the analysis of Women's College Partnership, the FRA carries greater weight than the Rating Driver.

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

Morningstar DBRS applied the following principal methodology:

Global Methodology for Rating Public-Private Partnerships (April 15, 2024)
https://dbrs.morningstar.com/research/431193/global-methodology-for-rating-public-private-partnerships

Morningstar DBRS credit ratings may use one or more sections of the Morningstar DBRS Global Corporate Criteria (April 15, 2024), https://dbrs.morningstar.com/research/431186, which covers, for example, topics such as holding companies and parent/subsidiary relationships, guarantees, recovery, and common adjustments to financial ratios.

The following methodologies and criteria have also been applied:
-- Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (January 23, 2024), https://dbrs.morningstar.com/research/427030.

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

A description of how Morningstar DBRS analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/431153.

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@morningstar.com.

The credit rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for this credit rating action.

Morningstar DBRS had access to the accounts, management and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is a solicited credit rating.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS trends and credit ratings are under regular surveillance.

Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available on dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.

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