DBRS Confirms Plenary Health Care Partnerships Humber LP at “A,” Stable Trend

DBRS Limited (DBRS) has today confirmed the ratings on the Series A Long-Term Senior Bonds and the Series B Long-Term Senior Bonds (collectively, the Bonds) of Plenary Health Care Partnerships Humber LP (ProjectCo) at “A” with Stable trends. ProjectCo is a special-purpose vehicle created to design, build, finance and maintain a new 1.7 million-square foot hospital facility (the Project) in northwestern Toronto, Ontario, under a 33.6-year project agreement (PA) with Humber River Regional Hospital (HRRH or the Hospital).

While substantial completion was achieved on the target date of May 11, 2015, final completion has taken longer than expected, and ProjectCo is working toward closing out the deferred work and deficiencies highlighted in HRRH’s review of the final completion status, some of which are the subject of disagreement. PCL, the Construction Contractor, has been paid in full, less 200% of the minor deficiency and deferred works completion budget as identified by the Independent Certifier. The facility is occupied by the Hospital and is in full operation.

The Project is in its 20th month of the 30-year service phase, during which Johnson Controls LP (JCLP or the Service Provider) performs all facilities management (FM) services on behalf of ProjectCo, including lifecycle obligations in order to return the facility in a state of good repair upon expiry of the PA. The Project had faced operational challenges in 2016, and ProjectCo reported a relatively high level of deductions and failure points. During the year, ProjectCo exceeded the threshold for warning and monitoring notices, and a monitoring notice was served by HRRH in September 2016. ProjectCo has indicated that the deductions and failure points were attributed to the high volume of work and requirement to adhere to the response times in the large facility when operations had yet to be stabilized. A rectification plan has been implemented by ProjectCo. The failure points have declined subsequently and are now below the threshold limits.

DBRS notes that HRRH has reported failure points that are significantly above those self-reported by ProjectCo. The differences are indicated to have arisen on account of different interpretations of the PA. However, HRRH has not gone through any dispute resolution mechanism pursuant to the PA for enforcing the additions to the ProjectCo reported failure points. DBRS will closely monitor the service performance, and there may be negative rating action in case of material deterioration in service performance or significant increase in, and the persistence of, high levels of failure points. DBRS expects timely communication on material service issues or communication from HRRH.

There are several ongoing formal disputes with HRRH relating mostly to the variations and output specification requirements. As substantial completion has been achieved, and service phase responsibilities and monetary deductions under the PA are fully passed down, there is not expected to be any financial impact to ProjectCo.

Financial projections for the service phase remain consistent with the financial model and are adequate for the rating. The minimum debt service coverage ratio (DSCR) of 1.25 times (x) and equity lock-up DSCR of 1.15x are typically seen for availability-based public-private partnership (PPP) projects in the “A” range. Further, the FM resiliency of 49% and lifecycle resiliency of 59% are supportive of the rating. A six-month debt service reserve and a relatively strong security package provided by the Service Provider will afford a modest cushion against unforeseen events during the service phase.

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 principal methodology is Rating Public-Private Partnerships (March 2016), which can be found on dbrs.com 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.