Morningstar DBRS Confirms Integrated Team Solutions SJHC Partnership Credit Ratings at A (low) with Stable Trends

DBRS Limited (Morningstar DBRS) confirmed Integrated Team Solutions SJHC Partnership’s (ProjectCo) Issuer Rating and the rating on ProjectCo’s Series A Senior Bonds (the Bonds) at A (low) with Stable trends. The credit rating confirmation stems from the satisfactory operational performance to date, stable financial outlook, and the generally productive relationship with the St. Joseph’s Health Care London (SJHC or the Hospital).

ProjectCo is the special-purpose entity (SPE) created to design, build, finance, and maintain two new mental health facilities in London and St. Thomas, Ontario (the Project), under a 32-year project agreement (PA) with the Hospital. Honeywell, a subsidiary of Honeywell International Inc. (rated “A” with a Stable trend by Morningstar DBRS), assumes, on a back-to-back basis, all of ProjectCo’s facility maintenance and lifecycle responsibilities through a fixed-price contract through the operating phase.

KEY CREDIT RATING CONSIDERATIONS
Honeywell fully rectified the antenna and radio communication system failures reported in late 2022 by re-installing relevant subsystems and, to date, they have not reoccurred. While the warning notice and monitoring notice thresholds were temporarily breached in 2022 because of such failures, instead of issuing a notice, the Hospital chose to work with Honeywell to settle on an agreement, which led to a direct payment by Honeywell to the Hospital in late 2023. Morningstar DBRS understands the relationship between the Hospital and Honeywell remains healthy, and a more frequent communication routine has also been established to enhance the partnership.

Some notable deductions were reported in August 2023 for the temporary unavailability of an elevator at the London site, which was rectified on the same day with the removal of a badge stuck in the elevator’s reader. Total deductions during the 12-month period ended February 28, 2024, amounted to approximately $16,000, compared with approximately $130,000 in deductions recorded in the prior year. Any deductions were fully passed down to Honeywell. Morningstar DBRS notes the total incurred failure points remained well below various thresholds to trigger any notice or event of default.

The lender’s technical advisor (LTA) identified a modest amount of deferred lifecycle works at both facilities for which Honeywell has already received the lifecycle payments. As per the Service Contract, Honeywell is required to provide ProjectCo with a letter of credit (LOC) for the amount of any deferred lifecycle works as a condition precedent to payment. ProjectCo has requested that Honeywell provide an LOC for the deferred lifecycle works, and, in the event that this does not happen in a timely manner, ProjectCo will withhold the amount from future lifecycle payments. Morningstar DBRS understands that a lifecycle audit will be completed in late 2024, based on which the final value of the LOC will be determined.

The Project received the energy gainshare payment for 2022–23 as expected. The energy consumption for the year ended January 31, 2024 (Energy Year 9), is again expected to be lower than target, resulting in energy gainshare this year. In accordance with the Service Contract, any energy gainshare or painshare adjustment will be passed down to Honeywell.

CREDIT RATING DRIVERS
DBRS Morningstar could take a negative credit rating action if the Project’s operating performance were to deteriorate materially, leading to an accumulation of failure points that could potentially trigger various contractual default thresholds or a replacement of Honeywell. Because of the fixed-price contract, there is limited upside on the Project’s financial metrics that could support a positive rating action.

FINANCIAL OUTLOOK
The Project’s debt service coverage ratio (DSCR) for the 12-month period ended February 29, 2024, was 1.20 times (x), which was again slightly lower than the projected DSCR of 1.21x, mainly because of two annual insurance payments falling under the same review period. For the next 12 months, the DSCR is expected to be 1.21x. Operating and maintenance and lifecycle resiliencies remain in line with the financial-close financial model at 47% and 43%, respectively.

CREDIT RATING RATIONALE
The credit ratings reflect the Project’s financial outlook, underpinned by strengths that include (1) the experienced service provider; (2) low public-sector counterparty risk; (3) lifecycle monitoring and reserving process; and (4) bondholders’ step-in rights. The challenges include (1) service provider 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.

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

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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