DBRS Upgrades CSS (FSCC) Partnership

DBRS Limited (DBRS) upgraded the rating of CSS (FSCC) Partnership’s (ProjectCo’s) $190.3 million Senior Secured Debt to A (low) from BBB (High) and removed the rating from Under Review with Negative Implications. ProjectCo is the special-purpose entity created to design, build, finance and maintain an approximately 665,000 square foot Forensics Services and Coroner’s Complex (the Project) under a 32.5-year public-private partnership with Ontario Infrastructure and Lands Corporation. Carillion plc, the original Service Guarantor, had provided the performance guarantee supporting the obligations of Carillion Services (FSCC) Inc., the original Service Provider, under its service contract with ProjectCo (the Service Contract). The current rating action results from 10647802 Canada Limited, an indirect, wholly owned subsidiary of Fairfax Financial Holdings Limited (Fairfax, rated BBB (high), Stable) acquiring the interests of Carillion Services (FSCC) Inc. in the Service Contract and Fairfax guaranteeing the performance obligations.

Background: On October 10, 2017, DBRS Limited (DBRS) downgraded the rating on ProjectCo’s Senior Secured Debt to BBB (high), Stable, as a result of a material deterioration of the credit profile of Carillion plc. On January 16, 2018, DBRS placed the rating Under Review with Negative Implications as a result of Carillion plc’s announcement that it had entered into compulsory liquidation. Insolvency of the Service Guarantor is an Event of Default as per the financing documents, although the financing documents provide that such Event of Default has not occurred if within 30 days ProjectCo provides a remedial plan acceptable to the Collateral Agent for prompt replacement of the Service Provider and/or the Service Guarantor. The period was subsequently extended by 60 days until April 17, 2018.

Recent Developments: On March 12, 2018, Carillion Services (FSCC) Inc. assigned its interests in the Service Contract and other related agreements to 10647802 Canada Limited, the new Service Provider, which is owned by Fairfax through its wholly owned subsidiary, 9477179 Canada Inc. The new Service Provider also assumed the obligations of Carillion Services (FSCC) Inc. under the contracts. DBRS understands that the employees of Carillion Services (FSCC) Inc. are continuing with the new Service Provider. Fairfax has provided a replacement guarantee on substantially the same terms as the original guarantee provided by Carillion plc.

As the remedial plan proposed by ProjectCo (which includes the delivery of the replacement guarantee from Fairfax) has been approved by the Collateral Agent and is being complied with, DBRS has removed the rating from Under Review with Negative Implications. Further, as the credit profile of Fairfax is investment grade, DBRS gives credit to the risk transfer to the Service Provider. The Project’s operating and maintenance and lifecycle resiliencies of 46.7% and 45.2%, respectively, map to an A (low) rating.

Performance Update: The Project has otherwise been performing well with no operating concerns. During 2017, failure points totalled 374 and deductions amounted to $81,972, both of which DBRS considers low. During the first two months of 2018, failure points amounted to 750 and deductions amounted to $1,104. The projected minimum debt service coverage ratio and equity lock-up debt service coverage ratio are 1.25 times (x) and 1.15x, respectively; the six-month debt service reserve and the letter of credit support for six months of operating and maintenance fees are maintained.

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

The principal methodology is Rating Public-Private Partnerships, which can be found on dbrs.com under Methodologies.

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 under Related Documents or by contacting us at info@dbrs.com.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

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