DBRS Morningstar Upgrades Ratings of SNC-Lavalin Innisfree McGill Finance Inc. to A (low), Stable

DBRS Limited (DBRS Morningstar) upgraded the Issuer Rating and the Series A Senior Amortizing Bonds rating of SNC-Lavalin Innisfree McGill Finance Inc., the financing vehicle unconditionally guaranteed by McGill Healthcare Infrastructure Group, G.P. (ProjectCo) and its General Partners, to A (low) from BBB (high). The trend was changed to Stable from Positive. ProjectCo is the special-purpose vehicle responsible for the design, construction, financing, and maintenance of a 217,500-square-metre hospital under a 34.3-year public-private partnership (the Project) with McGill University Health Centre/Centre Universitaire de Santé McGill (the Hospital; rated AA (low) with a Stable trend by DBRS Morningstar). The Project is currently in its 79th month of operation after having achieved Global Substantial Completion on November 5, 2014.

The rating upgrades are supported by the resolution of outstanding material disputes and the implementation of performance protocols in October 2018, followed by more than 30 months of sustained good service performance that has been evidenced by only minor monetary deductions to the monthly service payment and minor failure point accumulation. The rating of A (low), Stable trend, was also the rating initially assigned to the credit on July 9, 2010.

DBRS Morningstar notes the continued stabilization of service performance in the Hospital to date. For the 12-month reporting period from April 2020 to March 2021, there were relatively low Hospital-levied deductions related to service performance after the revised Project Agreement (PA) tolerances were applied. Furthermore, failure point accumulation is well within PA thresholds for warning notices, subcontractor replacement, and Events of Default, with failure points at 0% of the service provider replacement threshold and Event of Default Threshold in the PA. As noted in the last rating report on December 21, 2020, while ProjectCo continues to track and monitor both deductions and failure point service performance on a self-reported basis, the Hospital has agreed to suspend the Payment Mechanism regime and the application of service performance related deductions and failure points until the Coronavirus Disease (COVID-19) abates. Coronavirus-related costs including installation of hand-wash stations and temporary plexiglass for isolation continue to be paid for by the Hospital. Deductions are passed down from ProjectCo to the Service Provider, SNC-Lavalin Operations and Maintenance Inc.

The debt service coverage ratio (DSCR) for the trailing 12 months as at December 31, 2020, was slightly better than expected at 1.42 times (x) and is projected to be a minimum of 1.38x, on a full-year basis, throughout the term of the service phase. The better-than-expected DSCR is a result of the better-than-expected interest rates on cash balances. The operating and maintenance resilience and lifecycle resiliencies as per the original financial model are 60% and 125%, respectively. Negative rating pressure could result if there is material deterioration in the operating and financial performance of the Project resulting in material accumulation of failure points or deductions. A positive rating action is unlikely in the near term as the Project’s operating and financial metrics are commensurate with the rating category.

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), 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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