Morningstar DBRS Changes Trends to Negative and Confirms Plenary Health Care Partnership Humber Credit Ratings at A (low)

DBRS Limited (Morningstar DBRS) confirmed the Issuer Rating and the ratings on the Series A and Series B Long-Term Senior Bonds of Plenary Health Care Partnerships Humber LP (ProjectCo) at A (low) and changed the trends to Negative from Stable. ProjectCo is a special-purpose vehicle (SPV) created to design, build, finance, and maintain a new 1.7 million-square-foot (sf) hospital facility (the Project) in northwestern Toronto under a 33.6-year project agreement (PA) with Humber River Hospital (HRH or the Hospital). The Project is in its 94th month of the 30-year service phase after achieving substantial completion on May 11, 2015.

KEY CREDIT RATING CONSIDERATIONS
The trend changes stem from repeated disagreements with HRH over failure points and deductions, resulting in lengthy disputes, which may result in a strained relationship between ProjectCo and the Hospital. A new dispute arose over the December 2023 performance monitoring report (PMR), in addition to the current litigation related to the February 2021 PMR. The trend changes also reflect the uncertainty about how the new dispute may be resolved: while not expected, if, through the dispute resolution procedure, the Hospital proves entitled to require a replacement of the Service Provider, it may have a material impact on the key financial metrics of the Project.

On December 18, 2023, the facility experienced a power disruption affecting the substation that supplies power to a portion of the central utility plant equipment, which are designated as normal and conditional loads, including the chilled water circulation pumps. Because there was no power to these pumps, there was no flow of chilled water supply to the facility and, thus. multiple areas in the facility experienced very high temperatures that were out of range for an extended period of time. ProjectCo self assessed deductions of $41,000.

On March 6, 2024, the Hospital sent a letter to ProjectCo asserting that the events in December 2023 gave rise to $250,348.66 in deductions and 243,744 failure points, including over 200,000 availability failure points. As noted by HRH, the failure points in respect of availability failures asserted by HRH would exceed the threshold set out in section 42.5(a)(ii) of the PA, giving HRH the right to require ProjectCo to terminate the service provider and replace JCI.

As per the letters from ProjectCo to the Hospital, ProjectCo believes HRH does not have the discretion it is presently asserting to exercise its rights under section 42.5 of the PA since the alleged failure points are under dispute, therefore, not yet accrued under the definitions of the PA.

General operations were smooth during 2023, with no material deductions or failure points other than the December issue mentioned above. Morningstar DBRS notes that deductions related to the service phase have been fully passed down to the Service Provider without causing financial impact to ProjectCo. Morningstar DBRS continues to monitor the progress of discussions related to the pending disputes.

CREDIT RATING DRIVERS
Morningstar DBRS could take a negative rating action if the Hospital were to exercise its right to terminate the Service Provider under clause 42.5 of the PA, or if service performance were to materially deteriorate with high levels of failure points or deductions. Morningstar DBRS may change the Negative trend back to Stable if it becomes apparent that the Service Provider will not be replaced and the relationship with the Hospital is normalized as evidenced by the absence of new disputes that materially and negatively affect the Project’s operating environment.

FINANCIAL OUTLOOK
Per the latest compliance certificate, the debt service coverage ratio (DSCR) for the 12-month period ended November 30, 2023, was 1.26 times (x). For the next 12 months (ending November 30, 2024), ProjectCo expects the DSCR to be 1.23x. The minimum DSCR is 1.25x over the life of the Project, with lifecycle and O&M resiliencies of 59% and 49%, respectively.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental, Social, or 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 (January 23, 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 (October 11, 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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