DBRS Morningstar Confirms Accès Recherche Montréal L.P. at “A,” Stable Trend

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating and Senior Secured Debt rating of Accès Recherche Montréal L.P. (ProjectCo) at “A” with Stable trends. ProjectCo is the special-purpose vehicle (SPV) created by Axium Recherche L.P. and Meridiam Infrastructure (SCA) SICAR (Meridiam) to design, build, finance, and maintain a new 68,431-square metre research centre (the Project) under a 33.3-year public-private partnership with Centre hospitalier de l’Université de Montréal (CHUM or the Hospital), one of the Province of Québec’s (Québec or the Province; rated AA (low) with a Stable trend by DBRS Morningstar) largest health-care institutions.

The Project has been in operation for nine years and has performed relatively well, with the incurrence of failure points well below the contractual thresholds. The Lenders’ Technical Advisor (LTA) noted in its most recent operational report, dated January 2022, that the Project has generally reached a steady state of operation, and the failure points and deductions to date have been relatively minor. Furthermore, the facility remains in good condition, and the service provider, Honeywell Limited (Honeywell; a subsidiary of Honeywell International Inc. (rated “A” with a Stable trend by DBRS Morningstar)), appears to be completing most of the lifecycle activities in accordance with the lifecycle schedule. There were, however, some unexpected lifecycle works in 2021 related to construction defects, such as the vibration issue with the exhaust fans and the corrosion issue with the plumbing pipes, that had to be completed earlier than expected. Honeywell fully funded the associated lifecycle costs.

The LTA noted that the construction defect of the vibration issue with the high plume laboratory exhaust fans on the rooftop of the facility remained unresolved at the time of the report. However, ProjectCo indicated that the Design-Build Contractor will now fully fund the replacement cost of all the exhaust fans and, depending on the permits to be granted by the City of Montréal, the work is now expected to commence between 2023 and 2024. At present, the exhaust fans remain fully operational, and no notable failures have occurred. More importantly, there is redundancy in place to allow Honeywell to perform any repair to any affected fans without breaching the contractual performance requirement. Furthermore, the reverse osmosis system and the degasser installed as a permanent pretreatment solution to pretreat the steam before it enters the pipes in order to prevent further corrosion has been working successfully for almost two years, with no new leaks identified since the last leakage in the ceiling of the animal lab in 2018–19. The LTA considers this risk to be low.

The Project has reported lower-than-targeted energy consumption in each year since the start of Energy Year 1 in 2017, resulting in energy gainshare amounts that were passed down to Honeywell. Energy consumption was on average about 3% below target in 2017–21. Despite the energy savings realized over the past several years, Honeywell continues to undertake initiatives to further reduce the overall energy consumption of the Project by implementing the steam system modification project (which will be fully funded by the Hospital) that will provide energy savings and increase the life expectancy of the equipment in the hot water system. The project is ready to be implemented, subject to an agreement on how to address the energy saving as part of the energy agreement.

Although ProjectCo issued a Notice of Excusing Cause on March 26, 2020, with respect to the Coronavirus Disease (COVID-19) pandemic, Honeywell has continued to operate and maintain the Project without significant disruptions. Overall, the LTA noted that Honeywell has taken measures to maintain operations of the facility in accordance with the policies and recommendations of the Province.

ProjectCo achieved annual debt service coverage ratios (DSCRs) of 1.39 times (x) and 1.41x in June 2022 and December 31, 2021, respectively. The higher-than-expected DSCRs were the result of a lower SPV cost than what was projected in the financial model. Furthermore, the Project’s debt-to-cash flow available for debt servicing (CFADS) in 2021 was about 7.9x. In accordance with the financial model at financial close, DBRS Morningstar expects the Project to continue to generate a minimum DSCR of 1.37x in the operating phase and strong projected operating and maintenance and lifecycle resiliencies of 127% and 115%, respectively.

DBRS Morningstar could take a negative rating action if the Project experiences significant operational challenges that result in a material accumulation of failure points or deductions. An upgrade to the ratings is unlikely in the near term as the Project’s operating and financial metrics are commensurate with the rating category.

There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

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/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (May 17, 2022).

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

The principal methodology is Global Methodology for Rating Public-Private Partnerships (August 30, 2022; https://www.dbrsmorningstar.com/research/402155) which can be found on dbrsmorningstar.com under Methodologies & Criteria.

A description of how DBRS Morningstar analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/397223/interplay-of-global-corporate-finance-rating-methodologies-when-analyzing-corporate-finance-transactions

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.

The conditions that lead to the assignment of a Negative or Positive trend are generally 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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