DBRS Assigns A (low) Rating to Plenary Health Peel LP’s Series A Senior Bonds

DBRS has today assigned a rating of A (low) with a Stable trend to the $112.7 million Series A Senior Bonds issued by Plenary Health Peel LP (ProjectCo), which is the special-purpose entity created to design, build, finance and maintain a new 350,000 square foot hospital facility in Brampton, Ontario, under a 32.3-year project agreement (PA) with William Osler Health System (the Hospital). The rating is supported by the construction enhancement package, the sound credit quality of the contractor and the moderately low complexity of the work; the pass-down of relatively straightforward service obligations to a capable entity, the size of the security package and the operating and maintenance (O&M) and lifecycle resilience during the service phase are consistent with the rating as well. The low risk related to the availability payments to be received from the Hospital and the Province of Ontario (rated AA (low) with a Stable trend) also underpins the credit. However, the rating is constrained by the typical uncertainties surrounding construction projects, the relatively high leverage carried by ProjectCo and the limited resources available to weather unexpected shocks, such as the replacement of a key contractor.

ProjectCo will pass down the construction tasks and substantially all other risks during the construction phase to PCL Constructors Canada Inc. (PCL or the DB Contractor) under a fixed-price date-certain contract valued at $219.8 million. Construction of the new hospital began in May 2014, with delivery of the facilities expected by August 31, 2016. The facility will have three storeys above grade, a mechanical penthouse, and three levels below grade mainly for underground parking. The DB Contractor has provided a letter of credit of 5% of the contract price, a corporate subguard policy and a parent guarantee of 50% of the contract price from PCL Construction Group Inc. The resulting enhancement package, combined with PCL’s creditworthiness, is reasonably in line with that of construction projects in the “A” range. DBRS notes that the construction task is of low to moderate complexity, well within PCL’s capabilities, and that PCL has previous experience working within the public-private partnership space on several other hospital projects. The Lenders’ Technical Advisor (TA; BTY Group) has not identified any issues that could potentially pose undue risk.

The 30-year service phase will commence upon substantial completion and entails routine maintenance of the facility, including plant services, help desk services, grounds maintenance and security of systems infrastructure, as well as lifecycle maintenance in order to return the facility to the Hospital in a state of good repair upon the expiry of the PA. Except for general management and insurance responsibilities, all of ProjectCo’s obligations related to the services phase have been subcontracted for the term of the project on a back-to-back basis to Honeywell Limited (the Service Provider), which has considerable experience with clinical public-private partnerships (PPPs) and lifecycle maintenance. The output requirements outlined in the PA are clearly specified and deemed reasonable. The TA highlights that failure point thresholds are more stringent than observed on similar PPP projects, but remain manageable for a competent service provider such as Honeywell Limited.

A parent guarantee of 200% of the average annual O&M and lifecycle payments (indexed) upon termination, with liquid security provided by a letter of credit of 50% of the average annual O&M and lifecycle payment (indexed) will back the Service Provider’s obligations.

The financing of the project features a number of non-traditional features when compared to typical PPP projects. The minimum and average debt service coverage ratio of 1.18 times (x) and distribution lock-up of 1.14x are below the 1.20x and 1.15x levels, respectively, typically seen for availability-based PPP projects in the “A” range. However, the O&M and lifecycle resiliencies are both supportive of the A (low) rating, and the distribution cut-off has been positioned at proportionally the same level of erosion in the credit profile prior to trapping distributions. The proposed financing solution results in leverage that is higher than typically seen in PPP projects, at 94.4%; and, per the DBRS methodology Rating Public-Private Partnerships, a notch of downward pressure has been applied to the rating during the construction period. The high levels of leverage also result in an expected debt-to-cash flow available for debt service ratio of 13.6x after the first year of the service phase. Per the Common Terms Agreement section 8.23, Project Co shall ensure that the Bonds are rated for the first three years following the Substantial Completion Date. DBRS notes that in the event of a delayed compensation supervening event for which the DB Contractor is not providing liquidity, the Bonds and the Construction Loan Facility have been structured such that interest will continue to accrete for the first bond/loan payments. By the time of the second bond payment (six months after target substantial completion), ProjectCo would be in a position to declare a non-default termination, with proceeds sufficient to pay senior debt plus related breakage costs.

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.