DBRS Morningstar Downgrades Rainbow Hospital Partnership Ratings to BBB (high); Changes Trends to Stable

DBRS Limited (DBRS Morningstar) downgraded the Issuer Rating and the rating of the Series 2 Senior Bonds (the Bonds) of Rainbow Hospital Partnership (ProjectCo) to BBB (high) from A (low). DBRS Morningstar also changed the trends to Stable from Negative. ProjectCo is the special-purpose entity contracted by the Province of New Brunswick (the Province; rated A (high) with a Stable trend by DBRS Morningstar) to design, build, finance, and maintain a new 360,000-square foot mental health hospital (the Project) in Campbellton, New Brunswick, under a 33-year Project Agreement (PA).

DBRS Morningstar had confirmed the Issuer Rating and the rating of the Bonds at A (low) and maintained the Negative trends in March 2020. As noted in the press release titled “DBRS Morningstar Confirms Rainbow Hospital Partnership at A (low) with Negative Trends” (March 30, 2020), although the number of failure points and deductions had improved and the trend of the rating of the Province had stabilized, the trends assigned to ProjectCo remained Negative, pending further clarity regarding the rating of SNC-Lavalin Group Inc. (SNC or the Service Provider Guarantor). Potential further negative rating actions taken on SNC’s ratings would likely lead to negative pressure on ProjectCo’s ratings.

The ratings downgrade is primarily the result of the downgrade of SNC’s Issuer Rating and Senior Debentures rating to BB (high) from BBB (low) on November 2, 2020. DBRS Morningstar notes that, while the Project’s financial metrics and operating performance were not affected by the downgrade of SNC’s ratings, the Project’s business risk profile has been negatively affected. As such, DBRS Morningstar deems the extent of risk transfer to SNC-Lavalin O&M Inc. (the Service Provider) with a performance guarantee from a non-investment grade entity is no longer supportive of the A (low) rating. Furthermore, DBRS Morningstar considers the financial risk profile to be slightly weaker but appropriate for the BBB (high) rating after factoring in the increased requirements associated with self-performance of obligations by ProjectCo given that DBRS Morningstar does not give credit to the risk transfer to the Service Provider. A further erosion of the credit quality of SNC is unlikely to affect the ratings of the Project unless there is a need to replace the Service Provider and/or the Service Provider Guarantor.

At this time, DBRS Morningstar believes a positive rating action is unlikely in the short term. A negative rating action could result if the Project suffers a material deterioration in its operating performance, leading to an incurrence of significant failure points or material deductions.

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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