DBRS Morningstar Confirms SNC-Lavalin Innisfree McGill Finance Inc.’s Issuer Rating and Senior Amortizing Bonds at A (low), Stable Trends

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating, the Series A Senior Amortizing Bonds rating, and the Series B Senior Amortizing Bonds rating of SNC-Lavalin Innisfree McGill Finance Inc., the financing vehicle unconditionally guaranteed by McGill Healthcare Infrastructure Group, G.P. (ProjectCo) and its General Partners, at A (low) with Stable trends. ProjectCo is the special-purpose vehicle responsible for the design, construction, financing, and maintenance of a new 217,500-square-metre hospital under a 34.3-year public-private partnership (the Project) with McGill University Health Centre/Centre universitaire de santé McGill (the Hospital; rated AA (low) with a Stable trend by DBRS Morningstar). The Hospital achieved Global Substantial Completion on November 5, 2014.

For the 12-month reporting period from October 2022 to September 2023, very low Hospital-levied deductions were reported for service performance. Failure-point accumulation is well within Project Agreement thresholds for warning notices, subcontractor replacement, and Events of Default. Performance deductions are passed down to AtkinsRéalis O&M Inc. (AtkinsRéalis O&M) from ProjectCo. Discussions related to the renewal of the subcontract for facility security services are still ongoing and expected to be resolved in H2 2024.

The energy consumption in the previous reporting period resulted in no gainshare/painshare payment between the Hospital and ProjectCo. Energy Year #7 (December 2022 to November 2023) is again on track for no gainshare or painshare as energy consumption is expected to meet consumption targets.

Budgeted lifecycle costs for the near term include installing water heaters, changing the building access system, replacing medical air compressors, and changing epoxy floor in the laboratory animal house. Starting from the fifth year following commencement of the operational term (2018–19), both AtkinsRéalis O&M (for architectural elements of the Hospital) and Johnson Controls Canada L.P. (JCCLP) (for technical elements of the Hospital) are required to deliver an Annual Lifecycle Report to ProjectCo. Mott MacDonald issued the latest report in December 2023 and noted that the Project remains at a steady state and the facility appears to be well maintained. While the report mentioned a few ongoing disputes mainly relating to interpretations of the Project Agreement, most of them are expected to be resolved in 2024 and the total disputed amount is less than $1 million, which is immaterial to the Project.

The Facilities Management Services Contract and the Lifecycle Contract both include a mechanism to review cumulative lifecycle spending against lifecycle payments, allowing ProjectCo to retain funds from AtkinsRéalis O&M and JCCLP if there is a discrepancy. Following a review of JCCLP's ninth-year lifecycle report, ProjectCo currently retains $5.75 million ($5.72 million in 2022) of scheduled payments identified as being in excess of works performed.

The debt service coverage ratio (DSCR) was 1.35 times (x) for the trailing 12 months ended June 30, 2023, compared with the projected minimum DSCR of 1.27x. Negative credit rating pressure could result if the Project exhibits material deterioration of its operating and financial performance, leading to weakened credit metrics, whereas there is limited credit upside at the current credit ratings of A (low) with Stable trends.

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 (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.

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.

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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