DBRS Confirms SNC-Lavalin Innisfree McGill Finance Inc.'s Issuer Rating and Series A Senior Amortizing Bonds at BBB (high), Negative

DBRS Limited (DBRS) confirmed the BBB (high) ratings with Negative trends on the Issuer Rating and the Series A Senior Amortizing Bonds of SNC-Lavalin Innisfree McGill Finance Inc., the financing vehicle unconditionally guaranteed by of McGill Healthcare Infrastructure Group (ProjectCo) and its general partners. 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 with McGill University Health Centre (MUHC or the Hospital). While contractual amendments have been made to improve service period performance as well as settle several ongoing disputes, the trend remains Negative, as relations between the Hospital and ProjectCo continue to normalize and performance reporting related to historical disputed amounts has yet to stabilize.

The Hospital is currently in its 49th month of operations. During the past year, several amendments were made to key documents, including the Operating and Maintenance (O&M) Contract, to better align service performance with contractual requirements under the Project Agreement. Consent to these changes was provided by the Bondholders in early 2018. While service performance has seen improvement subsequent to the settlement of disputes with the Hospital in 2017 and contractual changes, historical monthly deductions and failure-point reporting are not yet fully reconciled between the Hospital and ProjectCo. In order to address this, several protocols were implemented on October 1, 2018, to provide clarity for materiality thresholds with respect to performance parameters and extension requests for delay in rectification times, among others. Formal processes have also been implemented to reconcile deductions and failure points that accumulate, including a monthly look-back committee. Reconciliation of historical deductions and failure points is targeted for H1 2019.

On February 2, 2018, ProjectCo formalized an amendment to the O&M Contract to pass down the remaining lifecycle responsibilities — that is, the cost and pricing risks associated with Architectural Lifecycle Obligations — to the Service Provider for a fixed price, subject only to inflation adjustments. DBRS considers the pass-down of the Architectural Lifecycle Obligations risk to the Service Provider to be an improvement to the overall risk position for ProjectCo.

To date, ProjectCo has passed down all deductions. The debt service coverage ratio (DSCR) was 1.38 times (x) as at June 30, 2018, and is projected to be a minimum of 1.38x, on a full-year basis, throughout the term of the service phase.

DBRS may take a positive rating action with a continued period of relatively low deductions and sustained improvement in the relationship between the Hospital and ProjectCo. It is expected that performance related to historical disputed amounts will be stabilized in the first half of 2019, at which time DBRS will reassess the ratings. While the level of deductions and failure points has seen improvement over the last several months, a negative rating action could be possible if the contractual relationship between ProjectCo and MUHC begins to show further signs of weakening.

Notes:
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 principal methodology is Rating Public-Private Partnerships, which can be found on dbrs.com under Methodologies & Criteria.

The rated entity or its related entities did participate initially 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.

The full report providing additional analytical detail is available by clicking on the link under Related Documents below or by contacting us at info@dbrs.com.