DBRS Removes Under Review with Negative Implications Status and Confirms Ratings on Hospital Infrastructure Partners (NOH) Partnership, Stable Trends

DBRS Limited (DBRS) removed the Issuer Rating and Series A Senior Secured Bonds rating of Hospital Infrastructure Partners (NOH) Partnership (ProjectCo) from Under Review with Negative Implications and confirmed both ratings at BBB (high). The trends are Stable. ProjectCo is the entity tasked with the design, construction, financing, operation and maintenance of the new Oakville Trafalgar Memorial Hospital (the Project) under a 34-year public-private partnership agreement with the Hospital.

The rating actions stem from the successful implementations of corrective measures which have addressed key operational issues and improvement in monitoring and the overall responsiveness to technical issues, factors which triggered DBRS’s placement of the ratings Under Review with Negative Implications in May 2016. The notable progress is evidenced by the diminishing trends in failure points and deductions over the last 24 months. The potential magnitude of Energy Painshare deductions was also previously identified as a factor contributing to the Project remaining Under Review with Negative Implications. However, in recent meetings with Halton Healthcare Services Corporation (HHS) and Infrastructure Ontario (IO), ProjectCo was provided with an indication that the Energy Painshare deductions for 2018 should be modest in relation to the liability cap under the service agreement. DBRS notes that, at this time, the Energy Painshare deductions have yet to be reviewed by the Lenders’ Technical Advisor.

On January 15, 2018, Carillion plc (Carillion) went into compulsory liquidation with immediate effect. Unaddressed, this would result in a default under the Project documents, although the Common Terms and Intercreditor Agreement provides as a cure that a non-defaulting party is to assume the obligations of the defaulted party if satisfactory to the Lenders. As such, in April 2018, after demonstrating the technical and financial capabilities of fulfilling Carillion’s obligations as a parent company guarantor and service provider, EllisDon Inc. (EllisDon) took over as the sole service provider and acquired Carillion’s issued and outstanding shares in ProjectCo and in the Service Provider entity. EllisDon was able to retain key personnel in place, which contributed to a successful transition process. At a recent site visit in November 2018, DBRS noted a considerable improvement in the relationship between HHS and ProjectCo and it was mentioned that the parties involved are working collaboratively toward achieving operational normalcy and are within the specified parameters of the Project Agreements.

ProjectCo’s financial metrics continue to perform as expected as deductions have been passed down to the service provider. Similarly, bondholders are insulated by the same pass-down mechanism. As of Q3 2018, operating performances year to date are trending positively with a 6% decline in failure points deductions year over year and an 82% reduction over the same period in 2016. In addition, energy metering in the colder months (i.e., December to February) is expected to decrease compared to previous years with the recent calibration of temperature sensors that will allow for better monitoring and optimization of energy consumption with accurate and factual temperatures readings.

Expectations for the near term are that any deductions will continue to be passed down to the service provider and ProjectCo will continue to perform as forecast with debt service coverage ratios of 1.25 times.

Continued and sustained reductions in failure points along with a formal agreement with IO and HHS on the Energy Gainshare/Painshare deductions could lead DBRS to take a positive rating action in the future. On the other hand, if some existing or new issues become permanent and material, leading to weakened financial metrics and impairment of resiliencies, DBRS could initiate a negative rating action.

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 & Criteria.

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.

DBRS will publish a full report shortly that will provide addi¬tional analytical detail on this rating action. If you are interested in receiving this report, contact us at info@dbrs.com.

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