DBRS Confirms Rating on Series 2 Senior Bonds of Rainbow Hospital Partnership

DBRS Limited (DBRS) has today confirmed the rating of A (low) with a Stable trend on the Series 2 Senior Bonds (the Bonds) of Rainbow Hospital Partnership (ProjectCo). The $51.5 million Series 1 Senior Bonds have been repaid, and DBRS has discontinued the rating on these bonds.

Project construction began in September 2011, with a target Substantial Completion Date of October 15, 2014, although because of a number of issues, Substantial Completion was only achieved on December 24, 2014. As the construction risk was passed down to the Design-Build Joint Venture (DBJV) on a back-to-back basis, liquidated damages were paid by the DBJV to ProjectCo. Final Completion was achieved on June 23, 2016, and LEED Silver certification was received July 6, 2016.

The service phase commenced after Substantial Completion and will end in October 2044. All risks and responsibilities with respect to maintenance and rehabilitation tasks under the Project Agreement (PA) have been passed down to SNC-Lavalin O&M Inc. (the Service Provider), whose operating experience and deduction history have been generally as expected, with a few exceptions. Most notably, on May 30, 2016, the Province of New Brunswick (the Province) issued a Warning Notice to the Service Provider in relation to the freezing of some heating/cooling coils, which caused flooding of areas adjacent to the hospital’s gymnasium on February 22, 2016. Materials from the flooded storage room were temporarily relocated to the periphery of the gymnasium to allow infection control measures to be taken, leading to the accumulation of failure points until the issue was rectified on March 23, 2016. DBRS notes that no other material issues have arisen since February. In the early months of occupancy, modest deductions were incurred, but deductions have since tapered off, and no deductions were experienced at all in the most recent month.

Typical of public-private partnerships, leverage was high at the end of the first full year of operations. Debt-to-cash flow available for debt servicing was approximately 8.7 times (x). The compliance certificate for the period ended June 30, 2016, indicates a trailing 12-month debt service coverage ratio of 1.21x. Given that ProjectCo’s revenues are fixed for the life of the PA, there will be limited ability to absorb any unexpected shocks such as replacement of the Service Provider. Nonetheless, DBRS’s break-even analysis points to resilience to material budget changes during the service phase that are supportive of the A (low) rating.

Given the nature of the fixed revenue and cost structure, DBRS expects positive rating pressure to be unlikely. However, DBRS notes that in recent years, the credit rating of the Province has come under increasing pressure. A lowering of the rating or trend, or the Province’s credit rating being placed under review could be expected to lead to a depression of the rating assigned to the Bonds.

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.

The full report providing additional analytical detail is available by clicking on the link under Related Research at the right of the screen or by contacting us at info@dbrs.com.