Morningstar DBRS Confirms Accès Recherche Montréal L.P.'s Issuer Rating and Senior Secured Debt at "A," Stable Trends

DBRS Limited (Morningstar DBRS) confirmed its Issuer Rating and Senior Secured Debt credit rating on Accès Recherche Montréal L.P. (ProjectCo) at "A" with Stable trends. ProjectCo is the special-purpose vehicle created by Axium Recherche L.P. and Meridiam Infrastructure (SCA) SICAR to design, build, finance, and maintain a 68,431-square metre research centre (the Project) under a 33.3-year public-private partnership with Centre Hospitalier de l'Université de Montréal (the Hospital), one of the Province of Québec's (rated AA (low) with a Stable trend by Morningstar DBRS) largest healthcare institutions.

KEY CREDIT RATING CONSIDERATIONS
The Project has been in operation for 11 years and has performed relatively well, incurring failure points below the contractual thresholds. However, there was a major power failure in the Project's vicinity during June 2024 that caused an electricity shutdown. As a result, ProjectCo and the service provider, Honeywell Limited (Honeywell; a subsidiary of Honeywell International Inc. (rated "A" with a Stable trend by Morningstar DBRS)), following discussions with the Hospital's technical team, performed load shedding; this took place principally in the administrative building and resulted in high heat and humidity in certain rooms. No deduction points were taken in June 2024 for unavailability of these rooms. The Hospital is challenging the June 2024 performance adjustment report, adding additional failure points to the 6,780 taken that month for several elevator unavailability events. Discussions between Honeywell and the Hospital are under way. An amount equivalent to the additional deductions claimed by the Hospital ($88,119.88) was held in September, being placed in a trust account as required by the Project Agreement (PA).

The Lenders' Technical Advisor (LTA) noted in its most recent operational report, dated January 2024, that the Project has generally reached a steady state of operation, and the failure points and deductions to date have been relatively minor. Furthermore, the facility remains in good condition from the site visit, and the service provider appears to be managing the operation, maintenance, and lifecycle of the facility appropriately. However, there are technical items that remain a potential risk, such as the vibration issues with the high plume exhaust fans on the facility's roof that remain unresolved. After considering a redesign and replacement of high plume exhaust fans for the laboratory and animal lab in 2023, ProjectCo and Design Build (DB) constructor discarded the plan because of the high cost and have finally opted for a more economical solution. DB constructor is buying and storing spare parts, in anticipation of delays in the delivery chain, so that the fans can be fully replaced and reassembled if necessary. At present, the exhaust fans remain fully operational and no notable failures have occurred. More importantly, there is redundancy in place to allow Honeywell to perform any repair to any affected fans without breaching the contractual performance requirement.

The Project has reported lower-than-targeted energy consumption in each year since the start of Energy Year 1 in 2017, resulting in energy gainshare amounts that were passed down to Honeywell. Energy consumption in 2023 (Energy Year 7) was 10% below target. Despite the energy savings achieved over the past several years, Honeywell continues to investigate and implement energy saving opportunities throughout the reporting period, such as replacing traditional lighting tubes with LED technology and modifying the hours in which the facility is lit. As per the LTA, the Hospital would like to achieve carbon neutrality by 2040, and continued discussions have been held to identify potential initiatives to achieve this. Nevertheless, actions at the Project seem to be limited as the facility is being supplied with electricity and steam from the Hospital.

CREDIT RATING DRIVERS
Morningstar DBRS could take a negative credit rating action if the discussions on the June 2024 report turn into a dispute, which could negatively and materially affect the Project. Morningstar DBRS could also take a negative credit rating action if the Project experiences significant operational challenges that result in a material accumulation of failure points or deductions. Morningstar DBRS is unlikely to upgrade the credit ratings in the near term given the limited upside revenue potential for an availability-based public private partnership transaction.

FINANCIAL OUTLOOK
ProjectCo achieved annual debt service coverage ratios (DSCRs) of 1.40 times (x) in December 2023 and 1.29x in June 2024. The lower-than-expected DSCR on June 2024 was due to a lump-sum payment of $3.3 million, in addition to the $3.9 million scheduled for lifecycle needs, according to the first amendment of the Service Provider Agreement and the PA on October 21, 2010. This amendment agrees to a repricing of the lifecycle budget (Schedule 45 of the Service Provider Agreement), payable upfront at the beginning of contract year 12 and that will be used over the following three years for lifecycle needs. In accordance with the financial model at such amendment in October 2010, Morningstar DBRS expects the Project to continue to generate a minimum DSCR of 1.37x in the operating phase with projected strong operating and lifecycle resiliencies of 127% and 115%, respectively.

CREDIT RATING RATIONALE
The credit ratings reflect the Project's financial outlook, underpinned by strengths that include (1) strong projected financial coverage, (2) experienced service provider, and (3) tight contractor payment mechanism. Challenges include no lifecycle reserving mechanism in advance of PA requirements and service provider retendering 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 Factors in Credit Ratings (August 13, 2024) at https://dbrs.morningstar.com/research/437781.

BUSINESS RISK ASSESSMENT (BRA) AND FINANCIAL RISK ASSESSMENT (FRA)

(A) Weighting of BRA Factors
In the analysis of ProjectCo, the relative weighting of the BRA factors in the availability-based section was approximately equal.

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

(C) Weighting of the BRA and the FRA
In the analysis of ProjectCo, 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 (August 13, 2024), https://dbrs.morningstar.com/research/437820

Morningstar DBRS credit ratings may use one or more sections of the Morningstar DBRS Global Corporate Criteria (April 15, 2024; https://dbrs.morningstar.com/research/431186), which covers, for example, topics such as holding companies and parent/subsidiary relationships, guarantees, recovery, and common adjustments to financial ratios.

The following criteria has also been applied:
-- Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (August 13, 2024), https://dbrs.morningstar.com/research/437781

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/431153.

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 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 info-DBRS@morningstar.com.

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