DBRS Assigns Provisional Ratings to EllisDon Infrastructure JBH Inc. of A (low), Stable Trends

DBRS Limited (DBRS) has today assigned provisional ratings of A (low) with Stable trends to the proposed $[137.7] million Series A Short Term Senior Bonds (Series A Bonds) and the $[186.8] million Series B Short Term Senior Bonds (Series B Bonds) to be issued by EllisDon Infrastructure JBH Inc. (ProjectCo), the special-purpose entity created to design, build and finance the construction of a new tower (the Tower) and refurbishment of portions of the existing hospital in Burlington, Ontario (the Project), under a 45-month Project Agreement (PA) with the Joseph Brant Hospital (JBH or the Hospital). The rating is underpinned by the sound credit quality of the construction contractor and its parent company, a comprehensive security package and the relatively straightforward nature of the construction task. DBRS also ascribes a low risk to the stream of completion payments to be received from the Hospital. However, the ratings are constrained by the typical uncertainties regarding construction adjacent to an existing operating hospital and the limited resources of ProjectCo to weather unexpected shocks.

The Project entails the design, construction and commissioning of a new 400,000-square foot (sq. ft.) seven-storey Tower that will house 28 intensive-care unit rooms and 144 inpatient beds, connection of the Tower to the existing hospital by a fixed link at ground level and renovations to approximately 150,000 sq. ft. of the existing facility, including upgrades to some inpatient rooms, upgrades to building automation systems, nurse call and fire alarm systems upgrade and renovations involving several departments. ProjectCo will pass down all design and construction tasks and substantially all other risks during the construction phase to EllisDon Design Build Inc. (The Construction Contractor) under a fixed-price date-certain contract valued at $331.5 million. Construction of the new hospital is scheduled to start in December 2014, with delivery of the new Tower targeted for July 2017 and substantial completion targeted for August 2018. The Construction Contractor has provided a letter of credit (LC) of 2.5% of the contract price, a Subguard policy with a project-specific policy limit endorsement of $34 million per occurrence and an aggregate maximum of $88 million, and a parent guarantee from EllisDon Inc. (EllisDon) up to the Construction Contractor’s 50% limit of liability under the project. The construction security package also features performance bonds and labour and materials bonds that are mandated under the PA in the amount of 50% of the cost of work. The performance and labour and materials bonds feature a multiple obligee rider that names JBH as an additional obligor. Given the low to moderate complexity of the Project, the resulting enhancement package, combined with EllisDon’s creditworthiness, places the rating at A (low). The Lenders’ Technical Advisor (TA; Tuner & Townsend cm2r) has not identified any material issues with respect to the design or construction approach. Upon completion of construction, the Project will be turned over to JBH, which will be responsible for the operations, maintenance and rehabilitation of the hospital.

As there is no service phase, the A (low) rating has been assigned solely on the basis of the construction phase rating. In contrast to a DBFM project but typical of DBF projects, the Project will not feature an equity contribution or a debt service reserve. For DBF projects, DBRS does not view traditional equity as essential to the capital structure, as ProjectCo is owned by the construction contractor and the only key party on which the Project and the bondholders rely for success is the construction contractor, which already has the proper incentive to complete the project given the extent of its financial involvement, indicated by the 50% parent guarantee and substantial security package. In addition, there will be a broader role for the LTA in the transaction entailing very tight monitoring. The two bond tranches will rank pari passu and share equally and rateably in the security.

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.

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

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