DBRS Morningstar Confirms Women’s College Partnership at “A” With a Stable Trend

DBRS Limited (DBRS Morningstar) confirmed Women’s College Partnership’s (ProjectCo) Issuer Rating and the rating on the $207.3 million Senior Secured Bonds (the Bonds) at “A” with Stable trends. ProjectCo is the special-purpose entity created for the design, construction, financing, maintenance, and rehabilitation of Women’s College Hospital (the Project) in Toronto under a Project Agreement (PA) with Women’s College Hospital (the Hospital) for a term of 30 years from scheduled interim completion.

The Project achieved interim completion on May 14, 2013, substantial completion on September 24, 2015, and final completion on April 4, 2019. The 30-year operating phase began on the achievement of interim completion. ProjectCo has subcontracted its operating and maintenance (O&M) responsibilities under the PA to Black & McDonald Ltd. (BML or the Service Provider) under a fixed-price, full-term service contract.

A joint technical review of the Project was performed by Jones Lang LaSalle Incorporated (JLL) in 2019. The report noted that the condition of the mechanical, electrical, architectural, and ancillary systems was generally excellent with only minor observations that could be easily managed by the Service Provider. At the time of the report, JLL also noted that the condition of the Project was excellent and there were no major concerns. BML has implemented most of the recommendations associated with the concerns noted in JLL's report. Of note, the building automation system was upgraded in 2019 and the Uninterruptible Power Supply System (UPS) batteries were replaced in 2020. In addition, the Service Provider adjusted the capacity of the Air Handling Units (AHUs) to optimal levels as some of them had been running at 100% capacity. At this time, ProjectCo indicated that there is no obvious deterioration in the AHUs and they are scheduled to be replaced in 2032 as originally planned. Furthermore, as recommended by JLL, the chemical flushing of the heating water loop that started in December 2020 was completed in March 2021. JLL also noted in its report that it had concerns about the service life of the three chillers and their associated systems if they were operating above their intended use and duration. ProjectCo intends to engage a consultant this year to perform a design review, as recommended by JLL.

DBRS Morningstar notes that ProjectCo retains the lifecycle risk of the Project. Although the presence of a three-year look-forward lifecycle reserve mitigates some of the risk, persistently higher-than-expected deterioration of the Project could drive lifecycle costs up considerably (beyond the reserve amount). If that were to occur, it could potentially affect the financial metrics negatively. However, at this time, DBRS Morningstar does not believe such a potential event would affect the financial metrics in the near term.

Since the beginning of the Coronavirus Disease (COVID-19) pandemic, the Project has continued to operate smoothly (including a fully operational COVID-19 Assessment Centre) and BML continues to operate in accordance with all health and safety protocols. The number of failure points and deductions incurred in 2020 (after the relief granted by the Hospital) declined by about 30% and 5%, respectively. However, in the first three months of operations in 2021, the number of failure points and deductions increased by more than 31% and 80%, respectively, compared with 2020. These were related to water leaks in multiple areas of the building and elevator performance issues. ProjectCo indicated that the water leaks occurred primarily at the joints and the Service Provider has repaired the affected pipes and replaced the damaged tiles and ceilings. Furthermore, BML inspected the affected areas and did not identify any major issues with the water pipes. DBRS Morningstar notes that, despite the sharp increase in the number of failure points and deductions, these remain well below the warning and monitoring notices of the contractual thresholds. In addition, the deductions incurred have been passed on to the Service Provider, so there has been no financial impact on ProjectCo.

DBRS Morningstar understands that there is an ongoing dispute with the Hospital related to the monitor replacement cost over the terms of the PA. While discussions are ongoing, ProjectCo indicated that it is finalizing the plan to replace the monitors this year and will be funding the replacement cost from project cash flow. DBRS Morningstar understands that the replacement cost is relatively minor and is not expected to affect the financial metrics materially this year. Furthermore, ProjectCo confirmed that it reserves the right to recover the replacement cost from the Hospital, subject to the resolution of the ongoing dispute.

ProjectCo confirmed that the energy base year has been finalized and accepted by the Hospital. ProjectCo and the Hospital are finalizing the standard operating procedure for calculating energy performance painshare and gainshare. Because the annual energy target has yet to be established, no energy gainshare/painshare has been applied since substantial completion was achieved in 2015. BML continues to measure the consumption of energy in accordance with the PA.

Despite the ongoing dispute related to the monitor replacement issue, ProjectCo indicated that the relationship between the Hospital, ProjectCo, and the Service Provider is good.

For the year ended September 30, 2020, the debt service coverage ratio (DSCR) of 1.39 times (x) was slightly below the projected DSCR of 1.44x. The lower-than-expected DSCR was mainly related to increases in lifecycle cost and in the major maintenance reserve account funding related to a shift in the lifecycle cost profile (deferral of some lifecycle works because the condition of those lifecycle items was better than expected). A lower-than-expected interest income also resulted in the lower-than-projected DSCR. The Project's minimum DSCR of 1.44x, coupled with O&M resilience of 83.9% and lifecycle resilience of 76.5%, remains supportive of the “A” ratings. While a positive rating action is unlikely, negative rating pressure could result if the Project incurs significant failure points as a result of a material deterioration in ProjectCo’s operating performance. Furthermore, a persistently higher-than-expected lifecycle cost may result in a material deterioration of the financial metrics, which may lead to a negative rating action.

ESG CONSIDERATIONS
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.

The full report providing additional analytical detail is available by clicking on the link under Related Documents below or by contacting 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