DBRS Downgrades Health Montréal Collective Limited Partnership to BBB with Stable Trend

DBRS Limited (DBRS) has today downgraded the Senior Secured Bonds of Health Montréal Collective Limited Partnership/Collectif Santé Montréal S.E.C. (ProjectCo) to BBB from BBB (high). The trend on the rating has been changed to Stable from Negative. ProjectCo is the special-purpose entity created to design, build, finance and maintain a new 772-bed health-care facility under a 38.8-year public-private partnership with the Centre Hospitalier de l’Université de Montréal (CHUM the Hospital) as evidenced by the Project Agreement (PA). The rating action primarily stems from continued erosion in the project’s schedule with a Phase 1 target substantial completion date now estimated to be the end of Q1 2017 and uncertainty with respect to the Construction Contractor’s ability to complete the remaining work within the revised schedule. This represents a further delay of 20 weeks from the revised date anticipated at the time of DBRS’s last review and 48 weeks relative to the original target substantial completion date of April 22, 2016.

At the time of the Trend Change in April 2016, DBRS raised concerns about the growing delays and noted that material deterioration in the schedule or in the negotiations between ProjectCo and the Hospital could trigger further negative rating action. Since then, Phase 1 construction has achieved 99% completion; however, some of the elements left are critical and require considerable time to complete. The latest schedule revision further reduces the 18-month buffer originally available between the Phase 1 target substantial completion date and the longstop date of October 22, 2017, under the PA. More importantly, a lender event of default arises under the Master Trust Indenture if delays continue beyond July 2017. DBRS acknowledges that the Construction Contractor has issued a formal Notice of Delay Event to CHUM several months ago and the Parties continue to work toward the execution of an Accommodation Agreement that will reduce the scope of work remaining to achieve Phase 1 substantial completion; however, the negotiations have been slow and no firm timeline has been provided as to when an agreement may be finalized.

DBRS notes that the primary buildings, including Blocks D, B1 and A’, are materially complete. Furthermore, all Variation Directives have been completed and paid with the exception of two Variations relating to changes to the equipment list and to the ventilation system.

Despite repeated revisions to the schedule, the full construction security package originally provided by the Construction Contractor remains available. 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 and applicable liquidated damages. Nevertheless, given the history of prolonged negotiations and a somewhat tenuous relationship with the Hospital, DBRS could take further negative rating action if Phase 1 substantial completion is not achieved by Q1 2017. Alternatively, DBRS could eventually restore the original rating of BBB (high) after Phase 1 substantial completion is achieved and ProjectCo has established a track record of smooth operation with low instances of service failures.

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 rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.