DBRS Changes Trend on Health Montréal Collective Limited Partnership to Negative

DBRS Limited (DBRS) has today confirmed the rating of BBB (high) on the $1,371 million Senior Secured Bonds of Health Montréal Collective Limited Partnership/Collectif Santé Montréal S.E.C. (ProjectCo); however, the trend on the rating has been changed to Negative from Stable. 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 evidenced by the Project Agreement (PA). The trend change primarily stems from the potential for prolonged construction delays and the slow pace of negotiations to have long-term effects on the relationship with the Hospital.

Since the time of its commentary last fall, the continuation and prolongation of construction delays have resulted in revision of the Phase 1 substantial completion target date to November 6, 2016, from April 22, 2016, a delay of approximately 28 weeks. Construction delays have been caused by inclement weather, the slow pace of design work and equipment procurement, an industry-wide strike and several variation directives issued by the Hospital. Although ProjectCo has taken mitigating steps to manage ongoing delays including re-sequencing activities and adding labour to accelerate works, the progress made in some cases has been complicated by new variations requiring finished work to be redesigned and reconstructed. Furthermore, delays to Phase 1 substantial completion will likely delay the commencement of work within the St. Luc Hospital, which affects the target substantial completion for Phase 2 of March 31, 2020.

ProjectCo’s design, construction and commissioning obligations have been passed down to affiliates of Laing O’Rourke Corporation Limited and Obrascón Huarte Lain S.A. (collectively, the Construction Contractor). The Construction Contractor has issued a formal Notice of Delay Event to the Hospital, anticipating a probable delay of six months. The PA Parties continue to work toward the execution of an Accommodation Agreement that will document the works that are needed to achieve Phase 1 substantial completion and those that will occur afterward and to detail responsibilities for liquidated damages, although DBRS feels that it is increasingly unlikely that the Accommodation Agreement will be put in place prior to April 22, 2016, to allow substantial completion to be met in a timely fashion.

Notwithstanding, despite seven months of construction delays, DBRS believes that completion of the works remains achievable, particularly given the 18-month longstop date under the PA. Liquid security of roughly 20% of the Phase 1 construction contract price as well as contractor holdback exist to cover approximately 30 months of debt service, sufficient to pay liquidated damages to keep bondholders whole. DBRS notes that successful completion of Phase 1 construction without significant erosion to the Phase 2 schedule as well as formal Hospital acceptance of the Accommodation Agreement could lead DBRS to re-establish the Stable trend at the revised target Phase 1 substantial completion date, whereas material deterioration in the schedule or in the negotiations between ProjectCo and the Hospital could trigger further negative rating action.

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 to the right under Related Research or by contacting us at info@dbrs.com.

The applicable methodology is Rating Public-Private Partnerships, which can be found on our website under Methodologies.