DBRS Changes Trends on SNC-Lavalin Innisfree McGill Finance Inc. to Stable from Negative, Confirms BBB (high) Ratings

DBRS Limited (DBRS) changed the trend on the Issuer Rating and the Series A Senior Amortizing Bonds of SNC-Lavalin Innisfree McGill Finance Inc., the financing vehicle unconditionally guaranteed by McGill Healthcare Infrastructure Group (ProjectCo) and its general partners, to Stable from Negative. DBRS also confirmed both of the ratings at BBB (high). 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). The trend change to Stable from Negative follows the resolution of outstanding material disputes and the implementation of performance protocols in October 2018, followed by a period of good service performance to date that has been evidenced by no monetary deductions to the monthly service payments.

In 2018, 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 (PA). At the time of the last rating report, DBRS noted that while service performance had improved subsequent to the settlement of disputes with the Hospital in 2017 and contractual changes, historical monthly deductions and failure-point reporting were not yet fully reconciled between the Hospital and ProjectCo. To address this, ProjectCo implemented protocols on October 1, 2018, to provide clarity regarding materiality thresholds for performance parameters and extension requests for delay in rectification times, among other items.

Since the finalization of the amendments to the O&M Contract and the implementation of the performance protocols, DBRS notes the improvement of service performance in the hospital facility to date. For the six-month reporting period from October 2018 to March 2019, there were no Hospital-levied deductions after the revised PA tolerances were applied. Accumulated failure points were 16% of the subcontractor replacement threshold (on a rolling six-month basis) and there is no long a discrepancy between ProjectCo’s self-reported calculations and those of the Hospital. In the latest reporting period, deductions related to service failures with certain sewage pumps and freezer doors damaging adjacent walls as well as other service failures that were minor in nature. Deductions are passed down from ProjectCo to the Service Provider, SNC-Lavalin Operations and Maintenance Inc.

While operating service performance as well as the contractual relationship between the Hospital and ProjectCo has shown improvement to date, discussions remain ongoing relating to commercial issues that have not yet been resolved. Commercial disputes outstanding include issues related to Minor Works and Variations between 2014 and 2016, Minor Works for security services, deductions and incentive payments. The total amount under negotiation is approximately $4.5 million. The Lenders’ Technical Advisor notes that final negotiations for a proposal addressing the outstanding commercial issues are taking place, although all costs and deductions associated with these items have been passed down to the respective parties. ProjectCo expects that final negotiations will be concluded by the end of 2019. The debt service coverage ratio was 1.38 times (x) as at June 30, 2019, 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 further positive rating action after a continued period of relatively low deductions and sustained improvement in the contractual relationship between the Hospital and ProjectCo. DBRS could take negative rating action if the negotiations with respect to outstanding commercial issues between the Hospital and ProjectCo become protracted or if the current level of deductions and failure points materially worsens.

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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