DBRS Finalizes BBB (high) Rating on Société en Commandite Santé Montréal Collectif/Health Montréal Collective Limited Partnership

DBRS has today finalized its rating of BBB (high) with a Stable trend on the $1,371 million senior secured bonds (Bonds) of Société en Commandite Santé Montréal Collectif/Health Montréal Collective Limited Partnership (ProjectCo). ProjectCo is the special-purpose entity created to design, build, finance and maintain a new 772-bed healthcare facility (the Project) under a 38.8-year public-private partnership (PPP) with the Centre Hospitalier de l’Université de Montréal (CHUM or the Hospital).

The rating is reflective of the equity and scale of contractors retained to assume and perform the construction and services, and the level of performance security provided to ProjectCo. The relatively low credit risk of the counterparties responsible for the availability-based payments to ProjectCo, namely the Province of Québec (the Province; rated A (high) with a Stable trend) and CHUM, also provide support to the rating. Notwithstanding, the credit profile of the Project faces constraints, some of which are common to all PPPs but others which are more specific to the Project, including a relatively long, multi-phased construction task in a congested urban setting which is adjacent to an operating hospital (Hôpital Saint-Luc), another ongoing construction project – Centre Recherche CHUM (CRCHUM) – and in close proximity to a subway line. As is normal for PPP projects, the leverage carried over the life of the Project and the limited resources of ProjectCo to handle unexpected shocks also limit the rating.

ProjectCo will pass down the construction tasks and the majority of risks to a design build joint venture (DBJV or the Construction Contractor) consisting of Laing O’Rourke Canada Ltd. (LOR) and OHL Construction Canada Ltd. (OHL) under a fixed-price date-certain contract valued at approximately $1.99 billion. Construction will take place across two phases, with Phase 1 spanning approximately 4.9 years, and Phase 2 occurring during the 3.9-year period between the Substantial Completion of Phase 1 and the target Substantial Completion Date for Phase 2 of March 27, 2020. DBRS considers the construction task to be at the high end of the moderate complexity category, as the relatively repetitive nature of many elements of the construction task is tempered by a lengthy construction period and tight working conditions which will require careful coordination. LOR and OHL are jointly and severally liable under the Construction Contract and their performance will be backed by joint and several guarantees for 50% of the contract price from LOR’s and OHL’s parents. Other supports to the Project include letters of credit totalling 13.6% of the entire contract price (17% of the Phase 1 contract price), which will be replaced by letters of credit totalling 25% of the Phase 2 contract price, a 12.5% performance bond at the Construction Contractor, 50% performance bonds and labour and materials bonds for all subcontracts valued at more than $5 million, and cash retention of up to 3% of the contract price, net of the retention of a portion of the first payment.

The resulting package enhances the standalone creditworthiness of the DBJV and places the rating comfortably within the BBB (high) rating category.

The 33.9-year service phase will commence upon substantial completion of Phase 1 and entail routine and lifecycle maintenance of the facility and electromechanical equipment, as well as management of energy consumption. Ancillary functions such as help desk services, grounds maintenance, waste management, pest control and security are also within the scope of the Project. With the exception of general management and certain insurance responsibilities, ProjectCo’s obligations with respect to the service phase will be passed down to Dalkia Health Services Montréal L.P. (the Service Provider). The Service Provider’s parent, Dalkia S.A.S., has limited PPP experience in Canada but considerable hospital and PPP experience globally. The Project also features a comprehensive approach to addressing lifecycle obligations, including inspections at years 10, 15, 20, 25 and 30 after Phase 1 substantial completion, requiring the Service Provider to reserve for any projected lifecycle shortfall, with no minimum threshold.
Typical of PPPs, leverage will be high at the end of the first full year of operations and debt-to-cash flow available for debt servicing will stand at approximately 10.0 times while the debt service coverage ratio is expected to be 1.25 times. Given that most of ProjectCo’s revenues will be fixed for the life of the Project, 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, which is more consistent with credits in the “A” range.

Notes:
All figures are in Canadian dollars unless otherwise noted.

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