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

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating and the rating of the Series 2 Senior Bonds (the Bonds) of Rainbow Hospital Partnership (ProjectCo) at A (low). Both trends remain Negative. ProjectCo is the special-purpose vehicle (SPV) contracted by the Province of New Brunswick (the Province; rated A (high) with Stable trend by DBRS Morningstar) 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 were assigned on April 3, 2018, 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 improved and the trend of the rating of the Province has stabilized, the trends remain Negative, pending further clarity regarding the rating of SNC-Lavalin Group Inc. (SNC or the Service Provider Guarantor; rated BBB (low) with a Negative trend by DBRS Morningstar).

Final completion was achieved on June 23, 2016, and the Project is in the sixth 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). On July 24, 2019, DBRS Morningstar downgraded the Service Provider Guarantor’s Issuer Rating and Senior Debentures rating to BBB (low) with Negative trends from BBB with Stable trends. As per DBRS Morningstar’s “Rating Public-Private Partnerships” methodology, DBRS Morningstar considers risk transfer to be effective when it is to a party of adequate size, significant relevant experience, and investment-grade worthiness.

On March 17, 2020, ProjectCo gave a notice to the Province about the existence of a force majeure event, based on the formal announcement of a Coronavirus Disease (COVID-19) pandemic by the World Health Organization. The force majeure event has the potential to create disruption of labour availability or supply or transportation of goods, services, or materials. ProjectCo continues to co-ordinate with the Province for any potential mitigation measures which may be implemented. DBRS Morningstar notes that in the case of termination of the Project Agreement from a force majeure event by either party, the Force Majeure Termination Sum would include the outstanding senior debt balance and senior debt termination costs.

Notwithstanding differences of positions regarding some categories of deductions, there is an open dialogue between the Service Provider and the Province and ProjectCo is of the opinion that, in general, the working relationship is good. As per the latest compliance certificate, the debt service coverage ratio (DSCR) for the 12-month period ending December 31, 2019, was 1.26 times (x). The lifecycle and operating and maintenance resiliencies of the Project remain supportive of the rating.

Given the nature of the fixed revenue and cost structure, DBRS Morningstar expects positive rating pressure to be unlikely. As such, DBRS Morningstar believes that the recurrence of significant failure points or material deductions relating to performance failures or potential further negative rating actions on SNC’s ratings would likely lead to negative pressure on ProjectCo’s ratings. Conversely, if SNC’s ratings are stabilized at an investment-grade level and deduction and failure points levels remain relatively stable, DBRS Morningstar will consider changing the trend on ProjectCo's ratings to Stable.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The principal methodology is Rating Public-Private Partnerships, which can be found on dbrsmorningstar.com under Methodologies & Criteria.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

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.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.

DBRS Morningstar will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving this report, contact us at [email protected].

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

DBRS Limited
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577