DBRS Confirms Integrated Team Solutions SJHC Partnership at A (low); Trends Remain Stable

DBRS Limited (DBRS) confirmed Integrated Team Solutions SJHC Partnership’s (ProjectCo) Issuer Rating and the rating of ProjectCo’s Series A Senior Bonds (the Bonds) at A (low) with Stable trends. ProjectCo is the special-purpose entity (SPE) created to design, build, finance and maintain two new mental health facilities in London and St. Thomas, Ontario (the Project), under a 32-year project agreement (PA) with St. Joseph’s Health Care London (SJHC or the Hospital).

The Project has performed relatively well since the start of operations in 2013, with limited incurrences of failure points that remain well below contractual thresholds. Deductions for the 12 months ended February 2019 were about 4% higher than those incurred for the previous 12-month period. The deductions were largely related to elevator events that occurred in May 2018 and July 2018 and were fully paid by Honeywell in accordance with the contractual agreement.

One notable event that occurred at the London facility in January 2019 was an elevator failure event that was caused by a malfunctioning bearing. The elevator was taken out of service for about two months and the bearing was replaced in mid-March 2019. ProjectCo expects to incur availability failure points and deductions resulting from the elevator event. However, ProjectCo indicated that the failure points incurred between January 2019 and March 2019 are expected to be below the warning and monitoring notices thresholds.

The closed-circuit television (CCTV) systems at the London and St. Thomas facilities have experienced intermitted connectivity issues that have resulted in some minor failure points and deductions. ProjectCo has indicated that it will be conducting software upgrades of its CCTV systems in both facilities in mid-April 2019 as part of its scheduled lifecycle works, which should resolve the connectivity issue.

The Project’s debt service coverage ratio (DSCR) of 1.25 times (x) for the year ended February 2019 was above the projected DSCR of 1.21x. The better-than-expected performance was primarily a result of higher interest income and the timing mismatch between lifecycle revenues and costs. ProjectCo indicated that the lifecycle payment remains in the lifecycle account and it will be released after Honeywell submits its invoices. Operating and maintenance and lifecycle resiliencies remain in line with the financial-close financial model, at 47% and 43%, respectively. For the next 12 months, the Project is expected to generate its target DSCR of 1.21x.

DBRS believes the Project’s operating and financial performance will remain relatively stable. However, DBRS could take a negative rating action on the ratings if the Project’s operating performance deteriorates materially, leading to an accumulation of failure points that could potentially trigger various contractual thresholds.

Because of the fixed-price service contract, DBRS believes it is unlikely that the Project’s financial metrics will change materially in the future and support a positive 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.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.

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