Morningstar DBRS Confirms Rainbow Hospital Partnership at BBB (high) with Stable Trends

DBRS Limited (Morningstar DBRS) confirmed Rainbow Hospital Partnership (ProjectCo)'s Issuer Rating and the credit rating on ProjectCo's Series 2 Senior Bonds (the Bonds) at BBB (high). Both trends are Stable. ProjectCo is the special-purpose vehicle contracted by the Province of New Brunswick (the Province; rated A (high) with a Stable trend) to design, build, finance, and maintain a 360,000-square-foot mental health hospital (the Project) in Campbellton, New Brunswick, under a 33-year Project Agreement (PA).

During the operations period, all risks and responsibilities regarding maintenance and rehabilitation tasks under the PA are passed down to AtkinsRéalis Operations & Maintenance Inc. (the Service Provider), with a parent guarantee from AtkinsRéalis Group Inc. (AtkinsRéalis or the Service Provider Guarantor; rated BB (high) with a Positive trend). Currently, Morningstar DBRS does not give credit to the risk transfer to the Service Provider as the performance guarantee is from a noninvestment-grade entity.

KEY CREDIT RATING CONSIDERATIONS
The Project is entering its 11th year of operations and the Project's operating performance in the past several years have been good with minimal incurrence of deductions and failure points. More recently, the number of failure points recorded in 2024 was very modest without incurring any deductions.

ProjectCo confirmed that the lifecycle work performed to date had been minimal and in line with the projection at financial close. In addition, an independent technical advisor (TA) will undertake its first review of the lifecycle budget in 2025. At the conclusion of the review, if there is a lifecycle payment shortfall greater than 10% of the remaining lifecycle budget, the Service Provider will either deposit the shortfall into a lifecycle reserve account or post a letter of credit.

The ongoing dispute regarding the facility damage caused by the patients has yet to be resolved. ProjectCo and the Province have selected an arbitrator and the arbitration process is still ongoing. The amount under dispute is only approximately $1.0 million and is borne by the Service Provider. Therefore, Morningstar DBRS believes irrespective of the arbitrator's decision, the disputed amount is relatively minor and it should not have any material impact on ProjectCo. Despite the ongoing dispute, the working relationship with the Province and the Service Provider remains good.

Moreover, the Province has requested ProjectCo to increase the security of one of the floors to accommodate youth patients with complex mental health needs. The renovation project is expected to be completed in 2025 and the cost of the renovation will be fully paid by the Province. At this time, ProjectCo indicated that it is not yet known if there will be any implications on the current operating and maintenance (O&M) and lifecycle cost profiles of the Project. However, ProjectCo confirmed that any increase in O&M and lifecycle cost will be adjusted in the monthly service payments.

Since the energy consumption target was established in 2022, ProjectCo continues to perform better than the annual energy target. In 2024, ProjectCo's total energy consumption was below the annual energy target by nearly 10%. As a result, ProjectCo had an energy gainshare adjustment in 2024 and it will be passed on to the Service Provider.

CREDIT RATING DRIVERS
Morningstar DBRS may take a positive rating action if the following occurs: (1) a material improvement in the credit quality of AtkinsRéalis Group Inc.; (2) the Project continues to perform well with minimal incurrence of deductions and failure points, and no material issues are raised by the technical advisor after the completion of the first lifecycle review; and (3) the O&M and lifecycle breakeven ratios are not negatively affected by the potential change in the O&M and lifecycle cost profiles following the completion of the renovation project.

A negative rating action may occur if the Project's operating performance were to deteriorate materially, leading to an accumulation of failure points that could potentially trigger various contractual thresholds.

FINANCIAL OUTLOOK
The debt service coverage ratio (DSCR) for the 12-month period ended December 31, 2024, was 1.32 times (x), which was slightly higher than previously projected largely because of higher-than-expected interest income. For the next 12 months (ending December 31, 2025), ProjectCo expects the DSCR to be 1.27x. The minimum DSCR is 1.22x over the life of the Project, with lifecycle and O&M resiliencies of 39% and 51%, respectively.

CREDIT RATING RATIONALE
The credit rating strengths of ProjectCo relates to a strong inspection and reserving mechanism for lifecycle work and a strong O&M resiliency that mitigates some of the potential risks during operations. In contrast, ProjectCo is relatively more exposed to inflation sensitivity and potential dispute with respect to the interpretation of the PA and the Facility Maintenance Agreement given that the relevant clauses from the PA have not been dropped down.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS

There were no Environmental/Social/Governance factor(s) 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 Rainbow Hospital Partnership, the Rating Driver factors in Part One -- Rating Availability-Based PPP of the methodology was approximately equal.

B) Weighting of FRA Factors
In the analysis of Rainbow Hospital Partnership, the following FRA factor listed in in Part One -- Rating Availability-Based PPP of the methodology was considered more important:

-- O&M and lifecycle breakeven ratios

C) Weighting of the BRA and the FRA
In the analysis of Rainbow Hospital Partnership, 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 (February 3, 2025) https://dbrs.morningstar.com/research/447186/morningstar-dbrs-global-corporate-criteria, 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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