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

DBRS Limited (Morningstar DBRS) 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 Morningstar DBRS) 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).

KEY CREDIT RATING CONSIDERATIONS
The Project achieved substantial completion on December 24, 2014, and achieved final completion on June 23, 2016. The Project is in the 10th year of a 30-year service phase ending on October 15, 2044.

The facility remains in relatively good condition. ProjectCo indicated that the planned lifecycle work performed to date had been minimal and in line with the projection at financial close. In addition, ProjectCo confirmed that an independent technical advisor (TA) will undertake the first review of the lifecycle budget beginning December 2024. At the conclusion of the review, if there is a lifecycle payment shortfall greater than 10% of the remaining lifecycle budget, the Service Provider will either deposit the shortfall into a lifecycle reserve account or post a letter of credit.

During the operations period, all risks and responsibilities regarding maintenance and rehabilitation tasks under the PA are passed down to AtkinsRéalis Operations & Maintenance Inc. (the Service Provider), with a parent guarantee from SNC-Lavalin Group Inc. (SNC or the Service Provider Guarantor; rated BB (high) with a Stable trend by Morningstar DBRS). Currently, Morningstar DBRS 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 relatively stable with minimal incurrence of failures points and deductions in the past few years. In 2023, the Project incurred a modest amount of failure points and deductions related to plant services.

The ongoing dispute regarding the facility damage caused by the patients of the Project has yet to be resolved. ProjectCo and the Province were unable settle the dispute last year and they have decided to submit their dispute to an arbitrator for determination later this year. The amount under dispute is only approximately $0.8 million and is borne by the Service Provider. Therefore, Morningstar DBRS believes that, irrespective of the arbitrator’s decision, the disputed amount is relatively minor and it should not have any material impact on ProjectCo. Despite the ongoing dispute, the working relationship with the Province and the Service Provider remains good.

The Province has requested ProjectCo to convert one of the floors to house youth patients. The renovation is expected to last eight to 10 months and the cost of this renovation will be fully paid by the Province. ProjectCo also indicated that this renovation will have implications on the current operating and maintenance (O&M) and lifecycle cost profiles of the Project. However, ProjectCo confirmed that the changes to the O&M and lifecycle cost should be relatively minor and any cost increase will be adjusted in the monthly service payments.

Since the energy consumption target was established in 2022, ProjectCo had been performing better than the target. ProjectCo had an energy gainshare adjustment in 2023 and it will be passed on to the Service Provider.

CREDIT RATING DRIVERS
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.

FINANCIAL OUTLOOK
Per the latest compliance certificate, the debt service coverage ratio (DSCR) for the 12-month period ended December 31, 2023, was 1.38 times (x), which was slightly higher than previously projected. For the next 12 months (ending December 31, 2024), ProjectCo expects the DSCR to be 1.30x. The minimum DSCR is 1.23x over the life of the Project, with lifecycle and O&M resiliencies of 39% and 51%, respectively.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
Environmental (E) Factors
There were no Environmental factors that had a relevant or significant effect on the credit analysis.

Social (S) Factors
There were no Social factors that had a relevant or significant effect on the credit analysis.

Governance (G) Factors
There were no Governance factors that had a relevant or significant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (23 January 2024) https://dbrs.morningstar.com/research/427030/morningstar-dbrs-criteria:-approach-to-environmental,-social,-and-governance-risk-factors-in-credit-ratings

RATING DRIVER AND FINANCIAL RISK ASSESSMENT (FRA)

A) Weighting of Rating Driver Factors
In the analysis of the Issuer, the relative weighting of the Rating Driver factors in the availability based section was approximately equal.

B) Weighting of FRA Factors
In the analysis of the Issuer, the following FRA factor in the availability based section was considered more important: O&M/Lifecycle Break-Even Ratios.

C) Weighting of the Rating Driver and the FRA
In the analysis of the Issuer, the FRA carries greater weight than the Rating Driver.

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

Morningstar DBRS applied the following principal methodology:

Global Methodology for Rating Public-Private Partnerships (11 October 2023)
https://dbrs.morningstar.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://dbrs.morningstar.com/about/methodologies.

A description of how Morningstar DBRS analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.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 info-DBRS@morningstar.com.

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.
Morningstar DBRS did have 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. Morningstar DBRS trends and credit ratings are under regular surveillance.

Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available on dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.

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