DBRS Morningstar Confirms Integrated Team Solutions SJHC Partnership at A (low) with Stable Trends

DBRS Limited (DBRS Morningstar) confirmed Integrated Team Solutions SJHC Partnership’s (ProjectCo) Issuer Rating and the rating of ProjectCo’s Series A Senior Bonds at A (low) with Stable trends. ProjectCo is the special-purpose entity 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).

For the year ended December 31, 2019, the Project incurred notably higher failure points compared with 2018. More than half of the failure points incurred were related to the discovery of mould (from a water leak) in a patient's bathroom. The bathroom and the patient's room were taken out of service for four weeks while the Service Provider, Honeywell Limited (Honeywell) performed the repair and remediation work. All associated deductions were fully passed down to Honeywell.

On March 20, 2020, Honeywell issued an Excusing Cause Notification to ProjectCo because of the Coronavirus Disease (COVID-19) pandemic and the subsequent measures that all levels of government are currently implementing to contain the spread of the virus, which may potentially affect Honeywell's ability to perform in accordance with its contractual agreements. Following Honeywell's notice, ProjectCo notified the Indenture Trustee and SJHC that it may seek relief under the PA on the same basis as Honeywell. In accordance with the PA, the declaration of an Excusing Cause allows ProjectCo to continue to be paid (including capital payment) without incurring any failure points and deductions associated with the impact caused by the outbreak (assuming there is no dispute with respect to the interpretation of the clauses). At present, the letters that ProjectCo have submitted to the Indenture Trustee and SJHC are not considered official Excusing Cause Notifications but merely a communication to the relevant parties that it reserves its rights to seek relief under the PA on the same basis as Honeywell.

At this time, Honeywell noted that the outbreak has not had an adverse impact on the Project. It is currently undertaking measures to mitigate the potential impact operationally.

The Project’s debt service coverage ratio (DSCR) for the year ended February 2020 was 1.21 times (x). 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 Morningstar 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, there is limited upside on the Project’s financial metrics that would support a positive rating action.

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’s outlooks 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].

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