DBRS Confirms Integrated Team Solutions SJHC Partnership at A (low), Stable

DBRS has today confirmed the Series A Senior Bonds of Integrated Team Solutions SJHC Partnership (ProjectCo) at A (low) with a Stable trend. ProjectCo is the special-purpose entity created to design, build, finance and maintain two new mental-health facilities in London, Ontario, and St. Thomas, Ontario, under the 32-year project agreement with St. Joseph’s Health Care London (SJHC or the Hospital).

The construction phase entails the design, construction and commissioning of a 454,025 square foot (sf) regional mental-health facility adjacent to Parkwood Hospital in London and a 234,430 sf regional mental-health forensics facility in St. Thomas. Except for the funding of certain supervening events, ProjectCo’s construction-related obligations have been passed down to EllisDon Corporation (the Construction Contractor) under two separate construction contracts that have a combined value of $374 million.
During 2012, construction activities generally progressed well at both sites. Based on the latest technical advisor (TA; Altus Group) report issued on February 21, 2013, 95% of the construction is complete at the St. Thomas site, measured by the value of construction contract. The building is water tight and the focus has now shifted to completing the interior finishes. The commissioning activities are also progressing on schedule. At the London site, approximately 50% of construction is complete. Although this is below the predicted budget, the TA and Construction Contractor have estimated that the actual cumulative cash flows shall return to the predicted level by the end of 2013 by way of accelerating the works and re-sequencing certain activities. The concrete works are virtually complete, and the full building permit was issued in January 2013. Major mechanical and electrical equipment has been installed and the electrical rough-in is progressing within the structures.

All the major subcontractors have been locked in at both sites, with some outstanding contracts related to non-critical works. The project guaranteed price remains unchanged at $374 million with a few minor variations to be separately funded by the owner. Based on the updated schedule provided by the Construction Contractor, the TA has opined that reaching the Scheduled Early Occupancy Date of April 25, 2013, at the St. Thomas site and the Scheduled Substantial Completion Date of October 28, 2014, at the London site is not a concern at this time. Both sites are on track to achieve the LEED Gold Certificate.

The completion of the St. Thomas facility will mark the beginning of the 30-year service phase. Except for general management, which will be performed by ProjectCo, all risks and responsibilities pertaining to core facility management (FM) and lifecycle maintenance will be undertaken by Honeywell Limited (rated R-1 (low) with a Stable trend by DBRS; the Service Provider) for the life of the project. DBRS notes that the service obligations are standard but exclude certain soft FM services generally passed down by the Province to the private sector, such as cleaning and security, resulting in a smaller operating budget.

The financial projections for the service phase remain consistent with the original financial model and are adequate for the rating. Typical of public-private partnerships, leverage is high, with debt-to-cash flow available for debt servicing projected at 11.0 times (x) in the first year of normalized operation and a standard debt service coverage ratio of 1.21x over the project’s term. Break-even results, although tight, are within the benchmark range and are balanced by the solid profile of the Service Provider, the straightforward nature of service responsibilities and the lifecycle review mechanism embedded in the contractual structure.

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 (November 2012), which can be found on our website under Methodologies.