DBRS Morningstar Downgrades TransEd Partners General Partnership Ratings to BBB (low), Negative Trends

DBRS Limited (DBRS Morningstar) downgraded the Issuer Rating and the rating on the Series A $394.5 million Senior Long-Term Amortizing Bonds (the Series A Bonds) of TransEd Partners General Partnership (ProjectCo) to BBB (low) from BBB. Both trends are Negative. The ratings downgrades are primarily a result of an unfavourable outcome of one of the ongoing claims that would have extended the contractual deadlines of the Valley Line light-rail transit Stage 1 project (the Project) meaningfully. Although ProjectCo has made considerable progress in construction this year and there is no further deterioration in the schedule since DBRS Morningstar downgraded the ratings in June 2020, ProjectCo does not envision that it can reduce the current delay materially. Furthermore, the current forecast provides very little time buffer before the Finance Party Longstop Date of October 15, 2021, and the Project Agreement Longstop Date of December 15, 2021. Therefore, DBRS Morningstar believes the current delay is likely to persist until service commencement unless a favourable outcome of the remaining claims lead to a meaningful time extension. DBRS Morningstar is also maintaining the Negative trends because the current forecast provides very little buffer in the event of encountering any unforeseen challenges with the remaining critical construction activities.

In the event that ProjectCo believes the forecast service commencement date will be delayed beyond the Finance Party Longstop Date, it will be required to submit an initial remedial plan to the satisfaction of the Lenders’ Technical Advisor (LTA) and to demonstrate that it will achieve service commencement no later than the Finance Party Longstop Date. In the unlikely event that ProjectCo fails to achieve service commencement by the Finance Party Longstop Date, it will trigger an event of default under the Common Terms and Intercreditor Agreement (CTIA). If that were to occur, it will not trigger an acceleration of the repayment of the credit facility and the Series A Bonds or a termination event under the Project Agreement, but rather will trigger certain rights and remedies as permitted under the CTIA.

ProjectCo indicated that the Design-Build Contractors (comprising affiliates of EllisDon Inc., Bombardier Inc., and Bechtel Corp.) have successfully completed the concrete deck structure of the bridge in September 2020. The remaining critical items are the completion of the trackwork, the installation of the overhead catenary system, the communication system and the light rail vehicle (LRV) signalling system, and testing and commissioning. ProjectCo also indicated that Bombardier Transportation Canada Inc. (Bombardier) has delivered 18 LRVs. The remaining eight LRVs are in various stages of assembly in Kingston, Ontario. Furthermore, the delivery schedule of the LRVs remains unchanged and all the LRVs will be manufactured by December 2020.

The LTA views ProjectCo’s testing and commissioning strategy and schedule to be reasonable. Although the Project is delayed, the testing and commissioning schedule entails sufficient time to resolve any unforeseen issues with respect to the calibration and integration of the systems. Furthermore, the eight to nine months of detailed dynamic testing aligns with similar light rail transit (LRT) projects in Canada. More importantly, ProjectCo is starting the integration testing with respect to the LRT signalling system and the City of Edmonton’s (the City’s) traffic signalling system in October 2020. This provides sufficient time to resolve any unexpected integration issues. DBRS Morningstar understands the testing and commissioning of the LRVs is continuing and it will continue until service commencement. Because ProjectCo shifted the commissioning activities early in the process to the Kingston site (prior to delivery), the LTA believes this strategy mitigates LRV testing and commissioning risk on site in Edmonton. Bombardier has also confirmed that there have not been any material issues with the LRVs while undergoing testing and commissioning in Kingston.

DBRS Morningstar notes that the LRT signalling system that ProjectCo will be using is a simple line-of-sight signalling system that controls the traffic light and gives priority to light-rail traffic. Moreover, a conductor will be driving the LRVs at all times, similar to operating any vehicle on the road. Therefore, it is a much simpler signalling system than the existing Metro Line LRT. Furthermore, the Project uses the same Bombardier LRVs as the Waterloo LRT, which has been in operation for more than a year without any major service disruptions. Therefore, at this time, DBRS Morningstar believes the testing and commissioning phase of the Project is not a major concern.

As it relates to Coronavirus Disease (COVID-19), ProjectCo provided the City with a notice of the occurrence of a Force Majeure Event pursuant to the epidemic or quarantine restrictions in February 2020, and multiple Relief Events related to designated changes in law and labour disruptions starting in March 2020. The City have been kept abreast of mitigation deployed by ProjectCo (e.g., train newly hired personnel, provide additional personal protective equipment, provide additional cleaning services) to mitigate the impacts.

DBRS Morningstar could take further negative rating actions if the Project encounters any unforeseen construction challenges that are likely to negatively affect the current forecast service commencement date. DBRS Morningstar believes the negative ratings pressure is likely to persist until either there is a meaningful time extension granted by the City or the Project achieves service commencement.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The principal methodology is Rating Public-Private Partnerships (August 19, 2020), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

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@dbrsmorningstar.com.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.

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