DBRS Morningstar Confirms Ratings on Hospital Infrastructure Partners (NOH) Partnership at BBB (high) with Stable Trends

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating and the rating on the Series A Senior Secured Bonds (the Bonds) of Hospital Infrastructure Partners (NOH) Partnership (ProjectCo) at BBB (high) with Stable trends. ProjectCo is the special-purpose entity tasked with the design, construction, financing, operation, and maintenance of the new Oakville Trafalgar Memorial Hospital (the Project) under a 34-year public-private partnership agreement with the Halton Healthcare Services Corporation (the Hospital). The Bonds mature six months before the last payments under the Project Agreement (PA) and include standard protection features, such as a six-month debt service reserve account, a distribution test requiring a minimum debt service coverage ratio (DSCR) of 1.15 times (x) on a historical and prospective basis, and additional senior indebtedness subject to the Bondholders’ approval.

The Project has been in operation for more than seven years and the facility remains in good condition. The Lenders’ Technical Advisor performed a lifecycle audit on the Project in 2021 and concluded that EllisDon Corporation (the Service Provider) had been carrying out the maintenance work as expected without deferring any significant maintenance work. There has also been minimal lifecycle work performed because the facility is still relatively new. A Joint Technical Review and Facility Assessment Condition was also performed by Morrison Hershfield between December 2020 and March 2021, which noted that the facility is in good condition and generally well maintained in accordance with the PA. ProjectCo indicated that it expects the scheduled lifecycle work to remain relatively modest in the next several years. Some of the planned lifecycle work entails performing a refresh of the audiovisual technology and replacing some of the parking system equipment.

Despite the relatively well maintained facility, the Project continues to experience operational challenges, resulting in a more than 20% increase in total failure points accrued for the 12 months ended September 30, 2022, compared with the same period last year. Correspondingly, the deductions associated with the total failure points increased by about 15%, and these have been paid by the Service Provider. The total failure points incurred has remained below the various contractual thresholds; however, DBRS Morningstar notes that the total failure points, on a rolling basis, have been trending upward in the past several months. The availability failure points represent most of the total failure points accumulated so far this year and are primarily related to some room temperatures exceeding the temperature range as permitted in the PA. DBRS Morningstar believes the temperature control issue will likely persist until a permanent solution is identified and implemented. Thus, DBRS Morningstar believes the Project's operating performance has yet to normalize to a level commensurate with an A (low) rating because there is still a greater likelihood of incurring higher levels of deductions and failure points.

The Project’s other operational challenge in the past 12 months was related to the parking management services, which resulted in the Hospital issuing a Monitoring Notice (indicating that failure points accrued from September 2021 to November 2021 exceeded the PA threshold) to ProjectCo in December 2021. The issue was due to an unstable server that resulted in failures related to credit card transactions. The server was subsequently replaced at the end of November 2021 and ProjectCo increased the level of monitoring and training as required in accordance with the Monitoring Notice. Upon satisfaction of the requirements, the Hospital then withdrew the Monitoring Notice in March 2022. The 35% decline in failure points accrued from July 2022 to September 2022, compared with the three-month rolling period that triggered the Monitoring Notice issuance, suggests an improvement in the parking management services.

ProjectCo indicated that discussion between the Hospital and the Service Provider with regard to the energy gainshare/painshare agreement is continuing. DBRS Morningstar understands that there will not be any changes made to the energy gainshare/painshare mechanism. The ongoing discussion is primarily related to finalizing the list of data to be input in the energy calculations. ProjectCo also confirmed that the Project's energy consumption for Energy Years 3 and 4 was higher than the contractual threshold, resulting in painshare deductions to be paid by the Service Provider to the Hospital. DBRS Morningstar understands that the painshare deduction amount for Energy Years 3 and 4 will be finalized in the coming months. The Service Provider has invested in certain energy efficiency initiatives at the facility in the past several years, so savings and smaller painshare deductions are expected for Energy Years 3, 4, and beyond compared with the first two years.

The Project’s financial performance remains relatively stable. DSCR for the year ended December 31, 2021, was 1.26x. For the year ending December 31, 2022, the projected DSCR is 1.25x.

DBRS Morningstar notes that, despite the Project's financial resiliencies mapping to a higher rating level than the current ratings, the ongoing operational challenges negatively affect the Project’s overall rating. At this time, DBRS Morningstar believes a positive rating action is unlikely until the Project has demonstrated that its operations have normalized, as evidenced by a sustained reduction in failure points along with a final agreement on the energy gainshare/painshare calculations. DBRS Morningstar could take a negative rating action if the Project's operating performance deteriorates significantly, leading to a greater likelihood of breaching various failure points-related contractual thresholds.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
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:
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.

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].

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