Morningstar DBRS Confirms Credit Ratings on CSS (FSCC) Partnership at A (low), Stable Trends

DBRS Limited (Morningstar DBRS) confirmed CSS (FSCC) Partnership's (ProjectCo) Issuer Rating and the credit rating on ProjectCo's $190.3 million Senior Secured Debt at A (low) with Stable trends. ProjectCo is the special-purpose entity created to design, build, finance, and maintain the new, approximately 665,000 square-foot Forensic Services and Coroner's Complex (the Project) under a 32.5-year public-private partnership with Ontario Infrastructure & Lands Corporation (OILC; formerly Infrastructure Ontario). The achievement of substantial completion on February 15, 2013, marked the commencement of the 30-year service phase, entailing routine maintenance of the facility and its electromechanical equipment, as well as management of energy consumption and lifecycle maintenance to return the facility to OILC in a state of good repair upon expiry of the project agreement. Final completion was achieved on May 26, 2016.

KEY CREDIT RATING CONSIDERATIONS
The Project has been performing well with no major operating concerns. Availability payments have been steady with minimal deductions and low failure points. For the 12 months ended September 30, 2024, the failure points were well within the tolerance threshold. Morningstar DBRS does not expect any significant changes in facility operations for the upcoming year and believes that operations will continue in a good state. ProjectCo indicated that the service provider and OILC maintained a good working relationship with no ongoing disputes, and the lifecycle resiliency of 45% and minimum debt service coverage ratio (DSCR) of 1.25 times (x) are supportive of the credit ratings. As per the latest compliance certificate, the Project's DSCR was 1.30x for the 12 months ended July 31, 2024.

The service provider is 10647802 Canada Limited, operating as Dexterra Integrated Facilities Management (Dexterra), with Fairfax Financial Holdings Limited (Fairfax; rated A (low) with a Stable trend by Morningstar DBRS) as the service guarantor. Dexterra became the service provider on March 12, 2018, after acquiring the interests of Carillion Services (FSCC) Inc. in the service contract. After Horizon North Logistics Inc.'s acquisition of the outstanding shares of 10647802 Canada Limited in May 2020, Fairfax indirectly holds only 49% interest in the service provider but continues as the service guarantor.

CREDIT RATING DRIVERS
While unlikely, a prolonged period of operational difficulties leading to substantial failure points could cause Morningstar DBRS to take a negative credit rating action. An improvement in resiliencies could lead to Morningstar DBRS taking a positive credit rating action.

FINANCIAL OUTLOOK
ProjectCo is projecting a senior DSCR of about 1.25x for the year ending July 31, 2025, which supports the current credit rating range.

CREDIT RATING RATIONALE
The credit ratings are supported by strengths that include (1) a comprehensive treatment of lifecycle risk, (2) low public-sector counterparty risk, (3) the lenders' step-in rights, and (4) the tight payment mechanism. The challenges include (1) a relatively weak operations security package and (2) the Service Provider Agreement 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) https://dbrs.morningstar.com/research/437781

RATING DRIVER AND FINANCIAL RISK ASSESSMENT (FRA)

(A) Weighting of Rating Drivers
In the analysis of ProjectCo, the relative weighting of the Rating Driver factors listed in Part One - Rating Availability-Based PPP of the methodology was approximately equal.

(B) Weighting of FRA Factors
In the analysis of ProjectCo, the following FRA factor listed in Part One - Rating Availability-Based PPP of the methodology was considered more important: lifecycle & O&M breakeven ratios.

(C) Weighting of the BRA and the FRA
In the analysis of ProjectCo, the FRA carries greater weight than the Rating Drivers.

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 methodology has also been applied:
Morningstar DBRS Criteria: Approach to ESG 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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