DBRS Comments on PA Amendments Made Between CSS (FSCC) Partnership and OILC

DBRS today notes that on January 30, 2013, CSS (FSCC) Partnership (ProjectCo; rated A (low), Stable, by DBRS) reached a settlement with Ontario Infrastructure and Lands Corporation (OILC or the Authority), whereby OILC has agreed to provide relief for delays and additional costs related to previously undisclosed salt contamination found on-site during construction, along with significant equipment variations. ProjectCo is the special-purpose entity created to design, build, finance and maintain a new 650,000 square foot Forensics Services and Coroner’s Complex (the Project) under a 32.5-year public-private partnership (PPP) with OILC. DBRS views the settlement as being at least credit-neutral for bondholders, as it provides financial compensation and schedule relief to ProjectCo that serves to restore the economics of the Project.

Per the terms of the settlement, OILC will make payments of $5.5 million (excluding HST and under two variation notices) to compensate ProjectCo for additional construction costs. OILC will also make annual payments of approximately $65,000 (indexed to CPI) for the full term of the 30-year operating period toward addressing supplementary services necessary to accommodate the altered equipment requirements. These amendments have been incorporated into the Project Agreement. Substantial Completion has also been redefined so that it will be achieved upon receipt of the occupancy permit, to be issued by the City of Toronto. A new milestone, Total Substantial Completion, has been added and is defined as meeting all of the requirements of the original definition of Substantial Completion and is scheduled for April 15, 2013, representing a ten-week extension from the original target Substantial Completion date of January 31, 2013. The Scheduled Final Completion Date has also been extended by ten weeks to June 7, 2013.

ProjectCo will be entitled to the Substantial Completion payment of $150 million once the requirements for the revised definition of Substantial Completion have been satisfied, and the monthly service payments will commence on the Payment Commencement Date, two days after Substantial Completion is achieved. ProjectCo anticipates that it will receive the occupancy permit by Friday, February 8, 2013. In the meantime, the DB Contractor will continue to pay liquidated damages, sufficient to cover debt service, until Substantial Completion is achieved. A portion of the Substantial Completion payment will be used to retire the bank debt.

DBRS believes that the amendments to the Project Agreement adequately compensate ProjectCo for the impact of the project delays, both financially and in terms of scheduling, and clear up ambiguity with respect to responsibility for those delays. Furthermore, failure to reach Total Substantial Completion within a specific time frame does not constitute an event of default under the Project Agreement. ProjectCo will not be subject to deductions from service payments, nor shall failure points be accrued, during the period between Substantial Completion and the earlier of Total Substantial Completion and April 15, 2013, providing ProjectCo with relief from meeting service requirements for an additional ten weeks relative to the original agreement. OILC’s planned financial compensation for the settlement covers the additional costs related to the increased capital and operating works and services associated with the two delay events. The remaining construction work between Substantial Completion and Total Substantial Completion consists of a narrow scope of construction, millwork, glazing and mechanical and electrical work, as well as commissioning, transitioning and furniture, fixture and equipment costs, all of which are of limited technical complexity and have been opined on by the LTA as achievable. As such, DBRS notes that the A (low) rating and Stable trend assigned to the senior secured debt of CSS (FSCC) Partnership are unchanged.

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

The applicable methodology is Rating Public-Private Partnerships (November 22, 2012), which can be found on our website under Methodologies.