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

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating and the Series A Senior Amortizing Bonds rating of SNC-Lavalin Innisfree McGill Finance Inc. (the Issuer), the financing vehicle unconditionally guaranteed by of McGill Healthcare Infrastructure Group (ProjectCo) and its general partners, at BBB (high). All trends remain Stable. ProjectCo is the special-purpose vehicle (SPV) responsible for the design, construction, financing, and maintenance of a new 217,500-square-metre hospital under a 34.3-year public-private partnership (PPP) with McGill University Health Centre (MUHC or the Hospital). The Stable trends are supported by 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. The Hospital is currently in its 61st month of operations.

DBRS Morningstar changed the trend on the ratings to Stable from Negative on July 16, 2019. Since that time, service performance has continued to improve, subsequent to the settlement of disputes with the Hospital in 2017 and the implementation of 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. At the time of the trend change, discussions remained ongoing relating to commercial issues and disputes for Minor Works and Variations between 2014 and 2016, Minor Works for security services, deductions, and incentive payments. A settlement agreement was reached to resolve the outstanding commercial negotiations in November 2019, and a release document is being finalized. All costs and deductions associated with these items have been passed down to the respective parties.

Since the finalization of the amendments to the Operating and Maintenance Contract and the implementation of the performance protocols in 2018, DBRS Morningstar notes the improvement of service performance in the Hospital to date. For the 12-month reporting period from April 2019 to September 2019, there were no Hospital-levied deductions after the revised Project Agreement (PA) tolerances were applied. In the latest reporting period, deductions related to service failures with certain sewage pumps, freezer doors damaging adjacent walls, and plumbing, 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.

The debt service coverage ratio (DSCR) was slightly better than expected at 1.39 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. The better-than-expected DSCR is as a result of the better than expected interest rates on cash balances as well as better-than-expected retail rental cash flows. DBRS Morningstar 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. While the level of deductions and failure points has seen improvement over the last several months, indications of a return to a weakened contractual relationship between ProjectCo and MUHC could result in headwinds to a positive performance outlook.

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 [email protected].

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar 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 [email protected].

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