DBRS Confirms Plenary Health Care Partnerships Humber LP at A (low); Maintains Negative Trend

DBRS Limited (DBRS) confirmed the Issuer Rating and the ratings on the Series A and Series B Long-Term Senior Bonds (the Bonds) issued by Plenary Health Care Partnerships Humber LP (ProjectCo) at A (low). All trends remain Negative. ProjectCo is a special-purpose vehicle created to design, build, finance and maintain a new 1.7 million square foot hospital facility (the Project) in northwestern Toronto under a 33.6-year Project Agreement (PA) with Humber River Hospital (HRH or the Hospital). On November 12, 2018, DBRS downgraded the ratings on the Bonds to A (low) from “A” due to sustained operational challenges faced by the Project, the issuance of a second monitoring notice, persistent deduction-related disputes with HRH and delays in achieving resolution to outstanding disputes. DBRS views these as indicative of some strain in the relationship with the Hospital as compared with other public-private partnership projects in the rating category. The Issuer Rating was initially assigned in line with ratings on the Bonds, pursuant to the implementation of DBRS’s “Rating Public-Private Partnerships” methodology, published on October 17, 2018. The Negative trends have been maintained as DBRS remains concerned about the increase in the amount of deductions referred to dispute resolution, the number of disputes, the outstanding warning and monitoring notices and the high level of deductions compared to replacement thresholds.

In June 2018, a significant deduction was taken by HRH for elevator downtime in March 2018 and April 2018, followed by another deduction in October 2018. Both deductions have been included in the dispute that was originally lodged after material deductions were incurred in October 2017 and November 2017 for a prolonged elevator failure. After a delay in selecting adjudicators, the selection process has been completed. However, the dispute is still pending resolution and the total amount of disputed deductions has increased to a substantial amount. Furthermore, final completion has been substantially delayed because of disagreements with HRH over the settlement offer for construction-related works and variation payments. This matter is also under dispute resolution and has been referred to arbitration.

The Project continued to face sustained operational challenges in 2018, evidenced by high levels of accumulated failure points and culminating with the issuance of monitoring and warning notices. The warning notice threshold for the Plant Services and Utilities Management (P&U) category was breached in July 2018, followed by a breach of monitoring notice threshold in subsequent months. On November 6, 2018, HRH served a monitoring notice to ProjectCo for exceeding the three-month rolling failure point threshold for the months of July, August and September 2018 under the P&U category. Soon after the rating downgrade on November 12, 2018, the Hospital issued another warning notice on November 21, 2018 for exceedance of failure points in the P&U category during October 2018. Since this warning notice was issued when the monitoring notice was already in effect, it gave HRH an option to exercise remedial rights under the PA. DBRS understands that the Hospital has not exercised any remedial rights at this time and several initiatives have been taken by Johnson Controls Canada LP (the Service Provider) to address service performance issues.

On August 7, 2018, a short yet heavy rainfall caused flooding that affected the basement level of the building. ProjectCo has noted that the restoration of affected areas was completed in mid-September and that a high amount of deductions, attributable to the flood event, were reported for August and September. DBRS understands that ProjectCo is in the process of requesting relief for these deductions from HRH. In the meantime, the Hospital has informed ProjectCo of their intention of deducting these accumulated deductions from monthly service payments; the amount could be deducted in the upcoming months.

DBRS notes that accumulated failure points remain below default thresholds and deductions related to the service phase have been fully passed down to the Service Provider without causing financial impact to ProjectCo. The DSCR per the compliance certificate for November 30, 2018, was at 1.23x, slightly lower than forecast of 1.25x, due to accounting adjustments, primarily attributable to insurance. DBRS will continue to closely monitor the service performance as recurring instances of the Hospital serving monitoring and warning notices as well as frequent spikes in failure points remain a cause of concern. DBRS could take further negative rating action if the deterioration in service performance continues with high levels of failure points or deductions, the operating environment worsens as a result of disputes with the Hospital or any other material adverse development. DBRS could reinstate the Stable trend if ProjectCo and the Service Provider are able to achieve a steady state of operations with a sustained period of low level of deductions and failure points, along with timely resolution of disputes with the Hospital.

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.

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.
 
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