DBRS Morningstar Confirms Plenary Properties LTAP LP Ratings at “A” with Stable Trends

DBRS Limited (Morningstar DBRS) confirmed Plenary Properties LTAP LP’s (ProjectCo) Issuer Rating and the credit rating on ProjectCo’s Long-Term Senior Bonds (the Bonds) at “A” with Stable trends. ProjectCo is the special-purpose entity (SPE) created by Plenary Canadian Holdings Inc. to design, build, finance, maintain, and provide IT and lifecycle services to the Communications Security Establishment (CSE) Long-Term Accommodation Project (LTAP). The project is governed by a 33.5-year Project Agreement (PA) signed between ProjectCo and the Government of Canada (the Crown; rated AAA with a Stable trend) as represented by Defence Construction Canada (1951) Ltd. (DCC). The office and special-purpose building of approximately 893,000 square feet (sf) are located in Ottawa (the City) and consolidate all services previously provided through four separate facilities by CSE, Canada’s foreign intelligence and national cryptologic agency.

The project is in the 10th year of its 30-year service phase, after having reached substantial completion on July 31, 2014. Honeywell Limited (Honeywell or the Facilities Management (FM) Service Provider), with a parent guarantee from Honeywell International Inc. (rated “A” with a Stable trend by Morningstar DBRS), performs all FM services and lifecycle services on behalf of ProjectCo to return the facility to a state of good repair upon expiry of the PA. ProjectCo’s obligations related to IT support, including associated maintenance and lifecycle services, are passed down on a back-to-back basis to ESIT Canada Enterprise Services Co. (ESIT Canada, the IT Service Provider; previously Hewlett Packard (Canada) Co. (HP)), with a parent guarantee from DXC Technology Company (DXC, considered investment grade by Morningstar DBRS).

KEY CREDIT RATING CONSIDERATIONS
In 2023, the project’s operating performance has been good. The deductions were higher as compared with last year but were still well below the contractual thresholds and considered low by Morningstar DBRS. ProjectCo informed Morningstar DBRS that the facility restoration for damage caused during the May 2022 fire incident has been completed and was covered by insurance.

The IT services benchmarking exercise began in November 2021, as required every five years from the third year onwards under the PA, and is ongoing. The FM and Security services benchmarking exercise commenced in November 2022, as required every six years from the third year onwards under the PA, and is also ongoing. ProjectCo expects the FM benchmarking exercise to be completed by mid-2024, and the Security services benchmarking exercise is estimated to be completed by April 2025. The IT benchmarking exercise is expected to be completed by the end of 2025.

ProjectCo is in a dispute with CSE over car parking payments. The CSE expects payments for the parking space utilization by ProjectCo. The matter is currently with a Referee as per the Dispute Resolution Process under the PA and is anticipated to be resolved in the coming months. Morningstar DBRS does not foresee any material impact on the project even if the decision is not in favor of ProjectCo. The relationship between the parties is otherwise collaborative, with no other material issues.

CREDIT RATING DRIVERS
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 or a replacement of Service Provider. Because of the fixed-price service contract, there is limited upside on the Project’s financial metrics that could support a positive rating action, which is unlikely in the near future.

FINANCIAL OUTLOOK
The Project’s debt service coverage ratio (DSCR) for the 12-month period ended January 31, 2024, was 1.41 times (x), which was higher than the projected DSCR of 1.23x mainly because of higher interest income, SPV cost savings, and additional revenue realized from projects outside the scope of the PA. For the next 12 months, the DSCR is expected to be 1.38x. Operating and maintenance and lifecycle resiliencies remain above 60%, in line with the financial-close financial model.

CREDIT RATING RATIONALE
The credit ratings are supported by strengths that include (1) strong FM and IT contractors, (2) minimal public-sector counterparty credit risk, (3) tight lifecycle inspection and reserving mechanism, and (4) bondholders’ step-in rights. The challenges include (1) extensive security requirements, and (2) contractor replacement risk.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant 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 listed in the methodology (Part One – Rating Availability-Based PPPs) was approximately equal.

(B) Weighting of FRA Factors
In the analysis of the Issuer, the following FRA factor listed in the methodology 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 BRA.

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 [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.

Morningstar DBRS 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. 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 [email protected].

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