Morningstar DBRS Upgrades Health Montréal Collective Limited Partnership/Collectif Santé Montréal S.E.C. to BBB (high), Changes Trends to Stable from Negative

DBRS Limited (Morningstar DBRS) upgraded the Issuer Rating of Health Montréal Collective Limited Partnership/Collectif Santé Montréal S.E.C. (ProjectCo) and the credit rating of ProjectCo's $1,371 million Senior Secured Bonds to BBB (high) from BBB (low). At the same time, Morningstar DBRS changed the trends on the credit ratings to Stable from Negative.

ProjectCo is the special-purpose vehicle (SPV) created to design, build, finance, and maintain a new 772-bed healthcare facility (the Project) under a 38.8-year public-private partnership (PPP) with the Centre Hospitalier de l'Université de Montréal (CHUM or the Hospital) under the Project Agreement (PA). The Project reached Phase 1 Substantial completion on March 31, 2017, and Phase 2 Substantial Completion on April 16, 2021.

KEY CREDIT RATING CONSIDERATIONS
The positive credit rating actions are a result of the successful certification of the third and final milestone of the Phase 1 deferred works (TR-3), the settlement of all the previous claims, litigation, and/or disputes through various settlement agreements, and a considerable improvement in ProjectCo's relationship with the Hospital since March 2024.

In March 2024, AtkinsRéalis Group Inc. (AtkinsRéalis) entered into ProjectCo's ownership structure by purchasing all the shares from Veolia Energy International SA and Veolia Energie Canada Inc. through one of its affiliates, 15586925 Canada Inc. Concurrently, AtkinsRéalis (also through its affiliates), purchased all the shares from Veolia Energie Canada Inc. (former owner of Veolia Health Operating Services Montreal LP (the Service Provider)). Subsequently, the name of the Service Provider was changed to AtkinsRéalis Operating Services Montreal L.P. Finally, the Service Provider's performance is now guaranteed jointly and severally by AtkinsRéalis (GBL) Limited and AtkinsRéalis Group Inc.

In November 2024, John Laing Group (John Laing) entered into ProjectCo's ownership structure by purchasing all of the shares from OHL Construction Canada Inc. through its affiliates, John Laing Health Montréal Inc. and John Laing Health Montréal Holdings Inc. As a result, ProjectCo is now owned by affiliates of Innisfree, John Laing and AtkinsRealis. For clarity, OHL Construction Canada Ltd. remains part of the Phase 1 Construction Contractor, and it is still responsible for its outstanding obligations.

In Morningstar DBRS' view, the above changes do not have a material negative impact on the credit quality of ProjectCo. Furthermore, Morningstar DBRS believes the following developments are positive credit factors that underpin the positive credit rating actions.

1. All the previous claims, litigation and disputes have been settled through various settlement agreements. As a result, ProjectCo is no longer involved in any claim, litigation, and/or material dispute that negatively affects the operating performance of the Project.

2. Morningstar DBRS believes there has been a notable improvement in the relationship between all project parties (including the Hospital) as evidenced by no new material disputes, alleged defaults, or various contractual breaches with the Hospital or the Service Provider. Furthermore, ProjectCo indicated that all the project parties are working collaboratively to finalize some potential changes in the performance standards of the PA and the minimum grace period of 12 months (no deductions and failure points to be applied from April 2024 to March 2025) remains in place despite no formal written agreement between ProjectCo, the Service Provider, and the Hospital.

3. Even without the grace period as mentioned above, the Project's operating performance has improved since March 2024 as indicated by very low levels of failures points up to October 2024.

4. The cost to complete the minor deficiency work is retained by the Hospital. The Hospital is responsible for paying the Phase 1 Construction Contractor for completing the minor deficiency work up to $9.5 million (includes contingency). At this time, Morningstar DBRS believes there is sufficient buffer to absorb any unexpected cost overrun. Furthermore, any delay in completing the minor deficiency work will not result in a termination event under the PA.

Nevertheless, ProjectCo noted that the progress-to-date regarding the minor deficiency work associated with the TR-3 has been slow. As of November 1, 2024, the Phase 1 Construction Contractor has only completed about 4% of the total number of items on the minor deficiency list. According to the minor deficiency list, the Phase 1 Construction Contractor has up to three years to complete the minor deficiency work. ProjectCo indicated that the Hospital has expressed some concerns with respect to the Phase 1 Construction Contractor's progress on the minor deficiency work. However, Morningstar DBRS understands that in the event of a delay in completing the minor deficiency work, this event will not trigger a termination event under the PA. While Morningstar DBRS currently does not believe there is a material risk that the Hospital will replace the Phase 1 Construction Contractor (given that the Independent Certifier has already accepted the Phase 1 Construction Contractor's proposed solutions to rectify some of the minor deficiency work that accounts for about 26% of the total number of minor deficiency items on the list), a prolonged delay in completing all the minor deficiency work may result in new and material disputes between the Hospital, ProjectCo, and the Phase 1 Construction Contractor.

The Project's financial performance remains relatively stable. For the year-ended September 2024, the DSCR was in line with expectations at 1.25 times (x).

CREDIT RATING DRIVERS
A positive credit rating action is not expected at this time. A negative credit rating action may be triggered if there are new and material disputes regarding the completion of the minor deficiency work and/or other operating issues that have a negative impact on the contractual relationship with the Hospital. Furthermore, Morningstar DBRS may take a negative credit rating action if there is a material deterioration in the operating performance resulting in a material rise in failure points that may trigger various contractual thresholds.

FINANCIAL OUTLOOK
Based on the financial model at financial close, Morningstar DBRS expects the Project's DSCR to be 1.25x for the year-ended October 31, 2025.

CREDIT RATING RATIONALE
The credit rating strengths of ProjectCo are (1) a comprehensive lifecycle review and reserve mechanism and (2) above-standard breakeven metrics for the current credit ratings. In contrast, the challenge relates to ProjectCo's slower-than-expected progress in completing the minor deficiency work and a prolonged delay may give rise to new disputes that may negatively affect the contractual relationship with the Hospital.

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 DRIVERS 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 the methodology was approximately equal.

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

C) Weighting of the Rating Drivers 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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