DBRS Morningstar Confirms CSS (FSCC) Partnership at A (low), Stable

DBRS Limited (DBRS Morningstar) confirmed CSS (FSCC) Partnership’s (ProjectCo) Issuer Rating and the rating on ProjectCo’s $190.3 million Senior Secured Debt at A (low) with Stable trends. ProjectCo is the special-purpose entity (SPE) created to design, build, finance, and maintain a new approximately 665,000-square-foot Forensic Services and Coroner’s Complex (FSCC or the Project) under a 32.5-year public-private partnership with Ontario Infrastructure and Lands Corporation (OILC; formerly Infrastructure Ontario).

The Project has been performing well with no major operating concerns. The achievement of Substantial Completion on February 15, 2013, marked the commencement of the 30-year service phase, entailing routine maintenance of the facility and its electromechanical equipment as well as management of energy consumption and lifecycle maintenance to return the facility to OILC in a state of good repair upon expiry of the Project Agreement. Final completion was achieved on May 26, 2016.

Availability payments have been steady with only nominal deductions and low failure points. During 2020, there were approximately 1,200 failure points, while service deductions amounted to less than $1,000. The deductions were the result of an elevator failure in October 2020. DBRS Morningstar does not expect any significant changes in facility operations for the upcoming year and believes that operations will continue in a good state.

The Service Provider is 10647802 Canada Limited, operating as Dexterra Integrated Facilities Management (Dexterra), with Fairfax Financial Holdings Limited (Fairfax; rated BBB (high) with a Stable trend by DBRS Morningstar) as the Service Guarantor. Dexterra became the Service Provider on March 12, 2018, after acquiring the interests of Carillion Services (FSCC) Inc. in the Service Contract. In May 2020, the outstanding shares of 10647802 Canada Limited were acquired by Horizon North Logistics Inc., a publicly listed corporation operating in modular solutions, facility management, and industrial services in Canada. As a result of the transaction, Fairfax, previously indirectly holding 100% interest in the Service Provider, now holds only 49% but continues as the Service Guarantor. DBRS Morningstar notes that any potential change in the Service Guarantor is subject to ProjectCo's and the Collateral Agent's consent.

ProjectCo indicated that the Service Provider and OILC maintain a good working relationship. A dispute has arisen between ProjectCo and OILC that relates to the benchmarking exercise conducted by the Service Provider in 2018 for market testing of the services, with an approximate value in dispute of less than $1 million. The risks are passed down to the Service Provider, and DBRS Morningstar does not consider this to be material from the lender's perspective.

As per the latest compliance certificate, the Project’s debt service coverage ratio (DSCR) was 1.25 times (x) for the year ended July 31, 2020. DBRS Morningstar notes that, while not expected, a prolonged period of operational difficulties that lead to substantial failure points or the Service Guarantor’s rating falling below investment grade could place negative pressure on the ratings. Given the fixed nature of the availability payment stream and operating costs, DBRS Morningstar considers a positive rating action unlikely.

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 (August 19, 2020), 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.

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

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