DBRS Confirms Rainbow Hospital Partnership at A (low) with Negative Trends

DBRS Limited (DBRS) confirmed the Issuer Rating and Series 2 Senior Bonds (the Bonds) rating of Rainbow Hospital Partnership (ProjectCo) at A (low). All trends are Negative. ProjectCo is the special-purpose vehicle contracted by the Province of New Brunswick (the Province; rated A (high) with a Negative trend by DBRS) to design, build, finance and maintain a 360,000-square foot mental health hospital (the Project) in Campbellton, New Brunswick, under a 33-year Project Agreement (PA). The Negative trends had previously been assigned as a result of the high number of failure points and deductions as well as the assignment of a Negative trend to the counterparty. While the number of failure points and deductions has recently improved, the trends remain Negative, pending further clarity regarding the rating of the Province and the Service Provider Guarantor (SNC-Lavalin Group Inc.; rated BBB and Under Review with Negative Implications by DBRS).

Final completion was achieved on June 23, 2016, and the Project is in the fifth year of a 30-year service phase ending on October 15, 2044. During the operations period, all risks and responsibilities with respect to maintenance and rehabilitation tasks under the PA are passed down to SNC-Lavalin O&M Inc. (the Service Provider). For 2018, ProjectCo reported a total of 7,613 failure points, a significant reduction from the 83,742 failure points reported the year prior. During 2018, the total deductions reported were $19,832, trending down from $46,639 reported in the previous year. In 2017, failure points were high, amounting to approximately 83% of the rolling 12-month event of default threshold and the threshold for warning notices was breached three times, although no warning notices were served by the Province. A large part of the failure points in 2017 were due to a few incidences of elevator unavailability that accumulated as a result of long subcontractor service response times exacerbated by the relatively remote location of the Project. The reduction in failure points and deductions is mainly explained by the change in the methodology of elevator unavailability reporting adopted by the Service Provider in late 2017.

Failure points have shown an overall declining trend, with the operations and maintenance (O&M) team following the tickets more closely and no notices have been served in the last 12 months, indicative of the collaborative relationship between parties.

On February 15, 2019, DBRS placed the Service Provider Guarantor’s Issuer Rating and Senior Debentures rating of BBB Under Review with Negative Implications. As per DBRS’s “Rating Public-Private Partnerships” methodology, DBRS considers risk transfer to be effective when it is to a party of adequate size, significant relevant experience and investment-grade worthiness. Also, DBRS believes that a single-notch downgrade of the Service Provider Guarantor, should one occur, would not be expected to affect the rating of the ProjectCo and the Bonds.

ProjectCo indicated that the Service Provider and the Province maintain a good working relationship. The debt service coverage ratio (DSCR) for the 12-month period ending December 31, 2018, was 1.27 times, which is in line with the expected DSCR. The lifecycle and O&M resiliencies of the Project remain supportive of the ratings.

Given the nature of the fixed revenue and cost structure, DBRS expects positive rating pressure to be unlikely. The recurrence of significant failure points or material deductions on account of performance-related failures could lead to negative rating pressure. Should further clarity pertaining to the ratings of the Province and the Service Provider Guarantor be received that lend support to the Issuer Rating and the rating of the Bonds, DBRS will consider changing the trend to Stable, provided that deduction and failure points levels remain relatively stable.

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.

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