DBRS Morningstar Changes Trend on Plenary Health Care Partnerships Humber LP to Stable from Negative, Confirms Ratings at A (low)

DBRS Limited (DBRS Morningstar) changed the trends on the Issuer Rating and the Series A and Series B Long-Term Senior Bonds ratings of Plenary Health Care Partnerships Humber LP (ProjectCo) to Stable from Negative. DBRS Morningstar also confirmed the ratings at A (low). ProjectCo is a special-purpose vehicle created to design, build, finance, and maintain a new 1.7 million-square-foot hospital facility (the Project) in northwestern Toronto under a 33.6-year Project Agreement with Humber River Hospital (the Hospital). Service period performance substantially improved during 2020, having achieved a steady state of operations with a sustained period of more than 12 months of low levels of deductions and failure points, along with timely resolution of disputes with the Hospital, which supports the trend change. However, DBRS Morningstar continues to monitor the progress of discussions related to pending disputes. The Project is in its 69th month of the 30-year service phase after achieving substantial completion on May 11, 2015.

For the second consecutive year, service period performance has improved after ProjectCo fixed issues related to the elevators and flooding in the basement and dialysis stations, all of which resulted in the application of significant deductions by the Hospital during the first years of operations. While the deductions were passed down to Johnson Controls Canada LP (the Service Provider), there are continuing discussions regarding recovering these deductions from PCL, the Construction Contractor and arbitration is currently scheduled for mid-2021.

The Project continues to make progress toward achieving final completion. A large portion of deferred works were submitted for approval to the Hospital at the end of 2019, and ProjectCo will reapply for final completion by the end of Q1 2021. ProjectCo does not expect any issues with achieving final completion during the latter half of this year. Ongoing construction-related works and variation payment matters have been referred to the Independent Certifier for determination under the dispute resolution procedures.

DBRS Morningstar notes that failure points have decreased by around 60% over the last 12-month period, with accumulated failure points well below default thresholds and deductions related to the service phase having been fully passed down to the Service Provider without causing financial impact to ProjectCo. The debt service coverage ratio per the compliance certificate for November 30, 2020, was 1.22 times (x), slightly lower than the forecast of 1.25x but higher than the minimum of 1.15x, primarily attributable to higher-than-expected insurance costs. DBRS Morningstar will continue to closely monitor the service performance going forward. DBRS Morningstar could take a negative rating action if service performance deteriorates again with high levels of failure points or deductions, if new disputes with the Hospital negatively affect the operating environment, or if any other material adverse development occurs. A positive rating action is not expected in the short term.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

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

The principal methodology is Rating Public-Private Partnerships (August 19, 2020; https://www.dbrsmorningstar.com/research/365975/rating-public-private-partnerships), which can be found on dbrsmorningstar.com under Methodologies & Criteria. Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021; https://www.dbrsmorningstar.com/research/373262).

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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