DBRS Changes Trend on SNC-Lavalin Innisfree McGill Finance Inc. to Negative

DBRS has confirmed the A (low) rating on the Series A Senior Amortizing Bonds of SNC-Lavalin Innisfree McGill Finance Inc. (the Issuer), the financing vehicle unconditionally guaranteed by Groupe immobilier santé McGill S.E.N.C. (ProjectCo) and its general partners. However, the trend on the rating has been changed to Negative from Stable. ProjectCo is the special-purpose vehicle responsible for the design, construction, financing and maintenance of a new 217,500 square metre hospital under a 34.3-year public-private partnership (PPP) with the McGill University Health Centre (the Hospital).

The trend change primarily stems from a similar rating action recently taken by DBRS on SNC-Lavalin Group Inc., the DB Contractor Guarantor on the project, but also reflects the continuation of significant delays on the project as well as the various issues that have plagued schedule recovery over the last year and the reticence of the Hospital to accept responsibility for certain variations and supervening events that have contributed the schedule erosion. In its last rating review, DBRS had noted that failure to materially reduce the construction delay could adversely affect the rating.

As a result, despite sustained acceleration efforts by the DB Contractor, only blocks E and F are expected to reach substantial completion by the original Scheduled Substantial Completion Date of September 30, 2014. For blocks A, B, C and D, construction works are projected to be completed by the Scheduled Substantial Completion Date, but commissioning is projected to extend to March 31, 2015. This estimate compares to a delay of approximately 16 weeks at the time of last year’s rating review and does not incorporate the impact of certain supervening events that likely added to the delay, including five bomb scares and a two-week construction industry strike.

Overall progress was estimated at 71.1% at the end of June 2013, and ProjectCo estimates that an additional 3% to 4% of the work was completed in July. DBRS notes that the problems encountered with the selection of equipment appear to have been resolved, which had been ongoing for nearly two years and consumed a considerable amount of management time. The parties agreed that for areas where the equipment is still outstanding, the DB Contractor would produce construction drawings based on mutually acceptable assumptions and that the Hospital would be responsible for any deviations from these assumptions. This seems to have stopped the erosion in the schedule and should allow all drawings to be completed by the end of the summer. Furthermore, nearly all permits have now been received and most of the subcontracts have been tendered except for certain equipment and finishing works. Nonetheless, concerns remain with respect to the large amount of Notices of Dispute outstanding, which currently total 11. ProjectCo maintains that the relationship with the Hospital remains cordial but the extent of the grievances is not common among Canadian PPPs.

Work over the remainder of the year will be focused on completing drawings, procuring and installing equipment, gradually starting the commissioning of equipment and electromechanical components, as well as finishing works. ProjectCo indicated that it may apply for the early delivery of block F (parking facility) by October instead of December. Recognizing that the rating of the DB Contractor only influences a project’s rating over its construction phase, DBRS notes that success at preventing further material erosion in the schedule and a favourable resolution of the various issues outstanding with the Hospital could lead DBRS to re-establish the Stable trend at substantial completion, whereas material deterioration in the schedule or in the relationship with the Hospital could trigger a downgrade.

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.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.