DBRS Limited (DBRS Morningstar) 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.
A joint technical review of the Project was performed by Jones Lang LaSalle Incorporated (JLL) in 2019. The report noted that the condition of the mechanical, electrical, architectural, and ancillary systems was generally excellent with only minor observations that could be easily managed by the Service Provider. At the time of the report, JLL also noted that the condition of the Project was excellent, and there were no major concerns. BML has implemented most of the recommendations associated with the concerns noted in JLL's report. Of note, the building automation system was upgraded in 2019, and the Uninterruptible Power Supply System batteries were replaced in 2020. In addition, the Service Provider adjusted the capacity of the Air Handling Units (AHUs) to optimal levels as some of them had been running at 100% capacity. At this time, ProjectCo indicates that there is no obvious deterioration in the AHUs, and they are scheduled to be replaced in 2032 as originally planned. Furthermore, as recommended by JLL, the chemical flushing of the heating water loop that started in December 2020 was completed in March 2021. Additionally, ProjectCo engaged a consultant to undertake an Eddy Current Test on the three chillers in Q1 2022. The results of the testing was favorable showing no deterioration in the condition of the chillers and no impact to early replacement. The Project is currently not expecting any large-scale works in the next few years.
DBRS Morningstar notes that ProjectCo retains the lifecycle risk of the Project. Although the presence of a three-year look-forward lifecycle reserve mitigates some of the risk, persistently higher-than-expected deterioration of the Project could drive lifecycle costs up considerably (beyond the reserve amount). If that were to occur, it could potentially affect the financial metrics negatively. However, at this time, DBRS Morningstar does not believe such a potential event would affect the financial metrics in the near term.
Since the beginning of the Coronavirus Disease (COVID-19) pandemic, the Project had continued to operate smoothly (including a fully operational COVID-19 Assessment Centre), and BML continues to operate in accordance with all health and safety protocols. The number of failure points and deductions incurred in 2020 (after the relief granted by the Hospital) declined by about 30% and 5%, respectively. However, in the full year of operations of 2021, the number of failure points and deductions increased compared with 2020 levels but were comparable with pre-pandemic metrics. DBRS Morningstar notes that despite the sharp increase in the number of failure points and deductions, these remain well below the warning and monitoring notices of the contractual thresholds. In addition, the deductions incurred have been passed on to the Service Provider, so there has been no financial impact on ProjectCo.
ProjectCo confirmed that the energy base year has been finalized and accepted by the Hospital. ProjectCo and the Hospital are finalizing the standard operating procedure for the energy performance painshare and gainshare calculation. Because the annual energy target has yet to be established, no energy gainshare/painshare has been applied since substantial completion was achieved in 2015. BML continues to measure the consumption of energy in accordance with the PA.
For the year ended September 30, 2021, the debt service coverage ratio (DSCR) of 1.41 times (x) was slightly below the projected DSCR of 1.44x. The lower-than-expected DSCR was mainly related to increases in lifecycle cost and in the major maintenance reserve account funding related to a shift in the lifecycle cost profile (deferral of some lifecycle works because the condition of those lifecycle items were better than expected). A lower-than-expected interest income also resulted in a lower-than-projected DSCR. 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. While a positive rating action is unlikely, negative rating pressure could result if the Project incurs significant failure points as a result of a material deterioration in ProjectCo's 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 rating action.
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.
All figures are in Canadian dollars unless otherwise noted.
The principal methodology is Rating Public Private Partnerships (August 19, 2021; https://www.dbrsmorningstar.com/research/383244) which can be found on dbrsmorningstar.com under Methodologies & Criteria. Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (May 17, 2022; https://www.dbrsmorningstar.com/research/396929) as mentioned above.
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07-Jul-22 Issuer Rating A Stb Confirmed US
07-Jul-22 Senior Secured Bonds A Stb Confirmed US