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

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating of Health Montréal Collective Limited Partnership/Collectif Santé Montréal 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 created to design, build, finance, and maintain a new 772-bed healthcare facility (the Project) under a 38.8-year public-private partnership (PPP) 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.

The credit rating actions are underpinned by the continuation of a challenging working relationship between CHUM and ProjectCo, which has resulted in numerous issuances under the PA of default notices (most recent default notice issued by CHUM was in December 2022) and warning notices (most recent warning notice issued by CHUM was in November 2023) to ProjectCo in the past several years.

DBRS Morningstar believes the prolonged delay in finalizing the completion of the third and final milestone of the Phase 1 deferred works (TR-3) has been one of the underlying issues negatively affecting the working relationship between CHUM and ProjectCo, and, to some extent, the Veolia Santé Services Montréal S.E.C (Service Provider).

In the absence of any timely and effective resolution resulting from either (1) the ongoing discussions between CHUM, ProjectCo, and the construction joint-venture (CJV) or (2) the ongoing arbitration process, leading to a successful certification of TR-3 and sustained improvement in the contractual relationships, DBRS Morningstar believes the credit ratings will likely continue to be under pressure.

The Project’s operating performance has been improving in the last couple of years. As reported by ProjectCo, service period performance failure points for the rolling 12 months ended October 2023 was approximately 15% (48,670) of the Event of Default (EOD) threshold of 314,586. The total number of failure points accrued for the same period was 39% lower than that of the same period in 2022. The improved operating performance also resulted in a lower 12-month average deduction of about $7,450 (as at the end of October 2023) compared with more than $13,000 and $47,000 in October 2021 and October 2020, respectively.

For the first several years, the lifecycle cost was much lower than projected primarily because the Phase 1 substantial completion was delayed by one year. Therefore, all lifecycle funds received from CHUM that were not paid to the Service Provider were placed in the Major Maintenance reserve. At the end of September 2023, the Major Maintenance reserve had a balance of about $5.3 million.

The annual lifecycle budget for 2023 was around $8.4 million. At the end of October 2023, the actual lifecycle cost incurred was about $7.0 million. Lifecycle budget 2024 indicates a modest rise in the lifecycle cost to around $8.9 million in 2024.

The Project’s financial performance has been relatively stable. For the year ended September 30, 2023, the Project's debt service coverage ratio (DSCR) was nearly 1.28 times (x), excluding the timing difference in tax payment. The higher-than-expected DSCR was primarily a result of higher interest income and the release of contingencies that were previously incorporated in the financial projection.

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, and ProjectCo continue to complete any valid requests of the Hospital. The tension between ProjectCo, the Hospital, and the Service Provider, as a result of alleged deficient and incomplete works continues to place pressure on the contractual relationships between the major project parties that, DBRS Morningstar believes, has the potential to affect the performance and financial metrics going forward.

An already strained contractual relationship may deteriorate further in the event the delay in achieving TR-3 certification extends beyond the date of the first comprehensive lifecycle cost review (to be undertaken by ProjectCo and the Service Provider) that is expected to commence in the next several years. A further strained contractual relationships or further legal action taken by CHUM may result in a credit ratings downgrade.

Successful certification of the outstanding deferred works and a sustained improvement in the contractual relationship between the Hospital and ProjectCo, along with a period of good service performance, could lead to stabilization of the credit ratings.

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/416784/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (July 4, 2023).

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

DBRS Morningstar applied the following principal methodology:
-- Global Methodology for Rating Public-Private Partnerships (October 11, 2023)
https://www.dbrsmorningstar.com/research/421701/global-methodology-for-rating-public-private-partnerships

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 credit rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for this credit 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 credit 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 credit ratings are under regular surveillance.

DBRS Morningstar will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving this report, contact us at [email protected].

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

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