DBRS Morningstar Maintains Under Review with Negative Implications Status on Health Montréal Collective Limited Partnership/Collectif Santé Montréal S.E.C.

DBRS Limited (DBRS Morningstar) maintained the Under Review with Negative Implications status on the Issuer Rating and the $1,371 million Senior Secured Bonds rating of Health Montréal Collective Limited Partnership/Collectif Santé Montréal S.E.C. (ProjectCo). ProjectCo is the special-purpose entity created to design, build, finance, and maintain a new 772-bed healthcare facility (the Project) under a 38.8-year public-private partnership with the Centre hospitalier de l’Université de Montréal (CHUM or the Hospital) under the Project Agreement (PA).

DBRS Morningstar placed the Senior Secured Bonds Under Review with Negative Implications on June 27, 2018. DBRS Morningstar then assigned the Issuer Rating on November 15, 2018, and subsequently placed it Under Review with Negative Implications. However, in a letter dated August 12, 2019 (the Notice), CHUM formally advised ProjectCo that it had defaulted on performing its obligations under the PA and that it must take all necessary actions to complete all outstanding work and correct all service deficiencies. The Hospital noted that, if ProjectCo failed to perform these obligations in a timely manner, CHUM would take necessary actions under the PA, which could include terminating the PA. ProjectCo provided the letter to DBRS Morningstar on August 16, 2019. DBRS Morningstar notes that, while the Hospital formally notified ProjectCo that ProjectCo defaulted on its performance obligations under the PA pursuant to the Notice, ProjectCo contends that the Notice refers to a general notice of alleged breaches for which it is working through and completing outstanding issues and disputes.

In addition to the issues regarding the healthcare facility’s environmental conditions and the cooling system’s capacity, DBRS Morningstar also placed the ratings Under Review with Negative Implications on June 27, 2018, because ProjectCo had accumulated service-period failure points leading to multiple warning notices, notices of remedial rights, and an initial and final notice of persistent breach asserted by CHUM and refuted by ProjectCo. Since DBRS Morningstar’s last report published on October 4, 2018, ProjectCo’s rate of failure-point accumulation trended lower with the cumulative 12-month total representing roughly 35% of the PA Event of Default threshold for the period ended August 2019. DBRS Morningstar notes service-period improvements in alarm management, preventative maintenance and coordination with CHUM, and Automated Guided Vehicles performance.

Despite the Hospital’s Notice in August 2019, ProjectCo continues to make progress toward addressing the outstanding scope of work and service-period deficiencies. Phase 2 works, performed by Pomerleau Inc., are progressing at a steady pace and should be complete by the contract date of May 2021. The Phase 2 scope of works includes an ambulatory site, administrative building, auditorium, and parking facilities. DBRS Morningstar maintained its Under Review with Negative Implications status on the ratings based on residual concerns that the persistent and forceful correspondence between the Hospital and ProjectCo may have long-lasting effects on the contractual relationship, which may have a material impact on ProjectCo’s performance and financial metrics going forward. DBRS Morningstar will continue to closely monitor ProjectCo’s performance as it completes the outstanding deferred works. DBRS Morningstar could take negative rating action if ProjectCo does not complete the remaining deferred works in a timely manner or if CHUM takes further legal action. Successful completion and certification of the outstanding deferred works and a sustained improvement in the relationship between the Hospital and ProjectCo, along with a period of good service performance, could favourably conclude the review period.

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 initially 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].

For more information on this credit or on this industry, visit www.dbrs.com or contact us at [email protected].

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