DBRS Morningstar Confirms Rainbow Hospital Partnership at BBB (high) with Stable Trends

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating and the rating on the Series 2 Senior Bonds (the Bonds) of Rainbow Hospital Partnership (ProjectCo) at BBB (high). Both trends are Stable. ProjectCo is the special-purpose vehicle contracted by the Province of New Brunswick (the Province; rated A (high) with a Stable trend by DBRS Morningstar) to design, build, finance, and maintain a 360,000-square-foot mental health hospital (the Project) in Campbellton, New Brunswick, under a 33-year Project Agreement (PA).

The Project achieved substantial completion on December 24, 2014, and achieved final completion on June 23, 2016. The Project is in the ninth year of a 30-year service phase ending on October 15, 2044. During the operations period, all risks and responsibilities regarding maintenance and rehabilitation tasks under the PA are passed down to SNC-Lavalin O&M Inc. (the Service Provider), with a parent guarantee from SNC-Lavalin Group Inc. (Service Provider Guarantor; rated BB (high) with a Stable Trend by DBRS Morningstar). Currently, DBRS Morningstar does not give credit to the risk transfer to the Service Provider as the performance guarantee is from a non-investment-grade entity.

The Project's operating performance has been good in the past few years. In 2022, there were relatively minor deductions and failures related to service performance. The dispute with the Province regarding the facility damage caused by patients has advanced, with the senior representatives from the ProjectCo and the Province having met in November 2022. The amount under dispute is only approximately $0.7 million and is borne by the Service Provider. Notwithstanding, ProjectCo has indicated the working relationship with the Province and the Service Provider is good.

After the energy consumption target was established in 2022, energy performance in the first year has been better than the target, and the Project forecasts gainshare adjustments, which will be passed on to the Service Provider. Per the latest compliance certificate, the debt service coverage ratio (DSCR) for the 12-month period ended December 31, 2022, was 1.26 times (x). For the next 12 months (ending December 31, 2023), ProjectCo expects the DSCR to be 1.34x. The minimum DSCR is 1.23x over the life of the Project, with life cycle and operating and maintenance resiliencies of 39% and 51%, respectively.

DBRS Morningstar believes a positive rating action is unlikely in the near term. A negative rating action may result if the Project’s operating performance deteriorates materially, leading to an accumulation of failure points that could potentially trigger various contractual thresholds.

ENVIRONMENTAL, SOCIAL, AND 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 (May 17, 2022).

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

The principal methodology applicable to the rating is Global Methodology for Rating Public-Private Partnerships (August 30, 2022; https://www.dbrsmorningstar.com/research/402155).

The rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

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.

Information regarding DBRS Morningstar ratings, including definitions, policies, and methodologies, is available on www.dbrsmorningstar.com or contact us at [email protected].

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