DBRS Morningstar Confirms Health Montréal Collective Limited Partnership/Collectif Montréal Santé S.E.C. at BBB (low) with Negative Trends

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating of Health Montréal Collective Limited Partnership/Collectif Montréal Santé S.E.C. (ProjectCo) and the rating of ProjectCo's $1,371 million Senior Secured Bonds at BBB (low). All trends remain Negative. ProjectCo is the special-purpose vehicle (SPV) created to design, build, finance, and maintain a new 772-bed healthcare facility (the Project) under a 38.8-year public-private partnership with the Centre Hospitalier de l’Université de Montréal (CHUM or the Hospital) under the Project Agreement (PA).

The Project reached Phase 1 completion on March 31, 2017, and Phase 2 Substantial Completion on April 16, 2021. DBRS Morningstar notes that while there have been no further default notices from CHUM in the current period, there have been warning notices issued as result of points accrued as a result the ventilation system and water flooding caused by leaking to facility areas. ProjectCo has either remediated the issues or is working with the Service Provider to identify and resolve the issues. With respect to the prior-period issues, ProjectCo has proposed solutions to address issues raised by the Authority with regards to directives issued by the Authority related to the pneumatic transportation system (PTS), the snow-flushing ventilation system, the Code Gray BMS Alarm system, the Chiller Interlocks, and the Ventilation Cross-Contamination HVAC system. As well, communications have been received from the Service Provider, Veolia Santé Services Montréal S.E.C (VSSM), alleging nonperformance of ProjectCo’s obligations under the Facilities Management Agreement (FMA), including its failure to complete Phase 1 by neglecting completion of deferred works affecting the ability to provide operations-period obligations and causing wrongful deductions from the periodic service payment, failure of ProjectCo to review and advise VSSM on works completed by CHUM in accordance with the Project Agreement, and failure to enforce the rights and claim defenses against CHUM under the PA as directed by VSSM, among others. In each of the allegations, ProjectCo maintains that the allegations lack contractual grounds, and that expert opinion and determination is being sought in accordance with the dispute resolution procedures under the FMA. ProjectCo and VSSM are working jointly to advance the resolution of these issues.

ProjectCo continues the effort to finalize completion of the final deferred works milestone submitted by application on July 26, 2021. The Independent Certifier IC notified ProjectCo on September 3, 2021, that the construction joint-venture's (CJV) Travaux Reportés (TR-3; the third and final milestone of the deferred works) TR-3 conditions were not achieved. The Hospital responded with an Event of Default (EOD) letter stating that ProjectCo needed to provide rectification measures within five business days of receipt of the IC's opinion on TR-3 and alleged that the delay in providing rectification measures would have a materially adverse impact on the performance of the Hospital's clinical and nonclinical activities. ProjectCo issued a formal Notice of Dispute on September 27, 2021, disputing CHUM’s allegation on the grounds that ProjectCo’s obligation was not triggered because the IC’s report was materially deficient and inconclusive. ProjectCo initiated the Party Representatives meeting on October 13, 2021, and neither Party has referred the Dispute to the next step of the Dispute Resolution Procedure (DRP). On March 8, 2022, ProjectCo issued a formal Notice of Arbitration in regards of certification of the third group of Deferred Works for Phase 1. An arbitrator has been selected and the proceedings will commence shortly. Furthermore, the IC issued a nonconformity list on March 31, 2022, which the IC believes needs to be completed to achieve TR-3. Several key items on this list relate to work with respect to Automatic Transfer Switches, the Pneumatic Transport System and the Automatic Guided Vehicles, valued at $8 million to remediate. ProjectCo continues to work with the Hospital to address alleged nonconformities related the TR-3 Phase 1 certification.

Although there are no specific default or termination right provisions associated with the delay in completion and certification of the TR-3 deferred works under the PA, CHUM, the CJV (Phase 1 Contractor), and ProjectCo continue to complete any valid requests of the Hospital. The tension between ProjectCo, the Hospital, and the Service Provider, the major project parties, as a result of alleged deficient and incomplete works continues to place pressure on the contractual relationship that, DBRS Morningstar believes, has the potential to affect the performance and financial metrics going forward. Furthermore, once the TR-3 is successfully certified and all outstanding issues are resolved, DBRS Morningstar expects that the relationship between CHUM and the major project parties could take some time to normalize.

The debt service coverage ratio (DSCR) is 1.24 times (x) with the first reporting period under the Master Trust Indenture being September 30, 2022, in line with the projected DSCR of 1.25x. DBRS Morningstar could take a negative rating action if ProjectCo does not complete the remaining deferred works in a timely manner or if CHUM takes further undisputed legal action. Successful certification of the outstanding deferred works or a sustained improvement in the contractual relationship between the Hospital and ProjectCo, along with a period of good service performance, could lead to a positive rating action.

There were no Environmental/ Social/ Governance factor(s) 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.

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 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.

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