DBRS Morningstar Downgrades TransEd Partners General Partnership

DBRS Limited (DBRS Morningstar) downgraded the Issuer Rating of TransEd Partners General Partnership (ProjectCo) and the rating on its Series A Bonds to BB while maintaining its status as Under Review with Negative Implications. ProjectCo is the special-purpose entity created to design, build, finance, maintain, and perform the lifecycle obligations of the Valley Line light-rail transit Stage 1 project (the Project) under a 34.8-year project agreement (PA) with the City of Edmonton (the City).

The downgrade of the ratings is a result of a further delay to the construction schedule. Prior to this further delay, the forecast Service Commencement Date was September 4, 2022; the PA Longstop Date is October 31, 2022. The current delay to the construction schedule is for the repair of cracks in the elevated guideway piers that were initially discovered in July 2022. The repair work must be completed before testing and commissioning of the trains can be resumed on the elevated guideways. Therefore, ProjectCo was not able to achieve the Service Commencement Date of September 4, 2022, as planned and the PA Longstop Date of October 31, 2022, was breached, triggering a Termination Event under the PA and an Event of Default under the financing agreements. DBRS Morningstar notes that no termination has occurred and ProjectCo is expected to enter into discussions for a resolution with the relevant parties on these issues. DBRS Morningstar understands the cost of repairs will be borne by the Design Build Joint Venture (DBJV) and the revised construction schedule is being discussed by ProjectCo and the City but has not been finalized. ProjectCo also indicated that some of the repair work has already commenced and the overall repair work is currently 31% complete.

DBRS Morningstar’s expectation remains that the parties will work together and eventually arrive at a solution and it does not expect termination of the PA at this time. Further, there has been no payment default and no cash flow shortage is expected with the DBJV responsible for paying of the liquidated damages. The $200 million credit facility (not rated by DBRS Morningstar) maturity is on December 22, 2022, and ProjectCo would require amendments to extend the maturity date to avoid a default on the facility.

DBRS Morningstar may take further negative rating actions if the discussions with the City and lenders do not conclude satisfactorily. In addition, there is a greater likelihood of further downgrades if the time buffer between the revised Service Commencement Date and the date when liquidated damages or other sources of cash are expected to be exhausted, is reduced significantly, or if the exercise of rights by the parties is expected to negatively affect ProjectCo or the rated debt. The ratings may be removed from Under Review with Negative Implications after the Project achieves Service Commencement.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/ Social/Governance (ESG) 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 (May 17, 2022).

DBRS Morningstar notes that this press release was amended on January 25, 2023, to include the Under Review With Negative Implications status in the rating table; the text of the press release was unchanged.

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.

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].

DBRS Limited
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577