DBRS Morningstar Confirms Integrated Team Solutions SJHC Partnership Ratings at A (low) with Stable Trends

DBRS Limited (DBRS Morningstar) confirmed Integrated Team Solutions SJHC Partnership’s (ProjectCo) Issuer Rating and the rating on ProjectCo’s Series A Senior Bonds (the Bonds) at A (low) with Stable trends. ProjectCo is the special-purpose entity (SPE) created to design, build, finance, and maintain two new mental health facilities in London and St. Thomas, Ontario (the Project), under a 32-year project agreement (PA) with St. Joseph’s Health Care London (SJHC or the Hospital). Honeywell, a subsidiary of Honeywell International Inc. (rated “A” with a Stable trend by DBRS Morningstar), assumes, on a back-to-back basis, all of ProjectCo’s facility maintenance and lifecycle responsibilities through a fixed-price contract through the operating phase.

ProjectCo was originally owned by EllisDon Inc. (25%) and by LPF Infrastructure Fund, OE Infrastructure Fund, and TCPP Infrastructure Fund (collectively, the Fengate Funds; 75%). Pursuant to a Securities Purchase Agreement dated May 13, 2022, EllisDon Inc. effectively transferred all of its equity interest in ProjectCo to the Fengate Funds, which are managed by Fengate Capital Management Ltd. DBRS Morningstar remains comfortable with the bankruptcy remoteness of ProjectCo as an SPE after reviewing an updated nonconsolidation opinion provided by ProjectCo’s legal counsel pertaining to the above equity transfer in May 2022.

DBRS Morningstar noted that the warning notice and monitoring notice thresholds were temporarily breached in late 2022 mainly because of certain antenna failures resulting in disrupted radio communications. Honeywell fully rectified the failure by installing/re-installing relevant radio communication subsystems and, to date, no further failure points have been recorded for such an issue. The Hospital did not issue any notice but chose to work with Honeywell directly to settle on an agreement, which is not expected to have a material impact on the Project. Some notable deductions were reported in February 2023 for the temporary unavailability of an elevator at the St. Thomas site, which was rectified on the same day with the replacement of the door operator board.

Total deductions during the 12-month period ended February 28, 2023, amounted to approximately $130,000. This is higher than the approximately $32,000 in deductions recorded in the prior year but is still less than 1% of the annual service payment, and such deductions were fully passed down to Honeywell. DBRS Morningstar notes the total incurred failure points remained well below various event-of-default thresholds.

The Project received the energy gainshare payment for 2021–22 as expected. The energy consumption for the year ended January 31, 2023 (Energy Year 8), is again expected to be lower than target, resulting in energy gainshare this year. In accordance with the Service Contract, any energy gainshare or painshare adjustment will be passed down to Honeywell.

The Project’s debt service coverage ratio (DSCR) for the year ended February 28, 2023, was 1.20 times (x), which was slightly lower than the projected DSCR of 1.21x mainly because of two annual insurance payments falling under the same review period. For the next 12 months, the DSCR is expected to be 1.21x. Operating and maintenance and lifecycle resiliencies remain in line with the financial-close financial model at 47% and 43%, respectively.

DBRS Morningstar could take a negative rating action if the Project’s operating performance deteriorates materially, leading to an accumulation of failure points that could potentially trigger various contractual default thresholds. Because of the fixed-price service contract, there is limited upside on the Project’s financial metrics that could support a positive rating action.

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 (May 17, 2022).

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

DBRS Morningstar applied the following principal methodology:
Global Methodology for Rating Public-Private Partnerships (August 30, 2022; https://www.dbrsmorningstar.com/research/402155)

The credit 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.

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 rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the rating process for this rating action.

DBRS Morningstar had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

This is a solicited credit rating.

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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