DBRS Morningstar Confirms Ratings on Hospital Infrastructure Partners (NOH) Partnership at BBB (high), Stable

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating and Series A Senior Secured Bonds rating of Hospital Infrastructure Partners (NOH) Partnership (ProjectCo) at BBB (high). Both trends remain Stable. ProjectCo is the special-purpose entity tasked with the design, construction, financing, operation, and maintenance of the new Oakville Trafalgar Memorial Hospital (the Project) under a 34-year public-private partnership agreement with Halton Health Services Corporation (HHS or the Hospital).

The ratings confirmation is supported by the continued success of the implemented corrective measures. These measures addressed key operational issues, improving both monitoring and the overall responsiveness to technical issues, factors which triggered DBRS Morningstar’s placement of the ratings Under Review with Negative Implications in May 2016. The notable progress is evidenced by the trends in failure points and deductions since May 2016. The potential magnitude of Energy Painshare deductions was also previously identified as a factor that contributed to the Project remaining Under Review with Negative Implications until December 2018. However, in discussion with HHS and Infrastructure Ontario (IO), ProjectCo was provided with an indication that the Energy Painshare deductions would be modest in relation to the liability cap under the service agreement. The final agreement of the calculation of Painshare/Gainshare has been approved this year with the submission of 2019 and 2020 Painshare amounts, which have both been passed down to the service provider, EllisDon Corporation. A Lender’s Technical Advisor lifecycle audit, which reviews the building’s condition, is expected to take place in early 2021.

ProjectCo’s financial metrics continue to perform as expected because deductions have been passed down to the service provider. Similarly, bondholders are insulated by the same pass-down mechanism. As of September 30, 2020 (nine months year to date), failure points totalled 169,720, up 185% from the same period in 2019, mainly because of the inconsistency issue between the building automation system and the Enterprise Building Integrator, which are each reporting different values for temperature and humidity. The service provider is currently working on resolving this issue and has agreed to take the financial hit until the issue is resolved. The remaining failure points were driven by minor items related to temperature control, parking equipment, washing equipment, and repairs. Deduction amounts were correspondingly approximately 134% higher than the same period in 2019. In February 2020 a significant event related to the lighting controls in the center block triggered the warning notice threshold; however, HHS agreed to waive the issuance of the warning notice because of the consistent good service provided by the service provider and the mitigation measures that have been put into place.

DBRS Morningstar notes that the overall failure points level have generally remained below the project agreement’s monitoring threshold and the deductions incurred have been passed on to the service provider, so there has been no impact on payments to ProjectCo or the Bondholders. Expectations for the near term are that any deductions will continue to be passed down to the service provider and ProjectCo will continue to perform as forecast with debt service coverage ratios of 1.25 times.

Continued and sustained reductions in failure points along with a formal agreement with HHS on the Energy Gainshare/Painshare deductions could lead DBRS Morningstar to take a positive rating action in the future. On the other hand, if some existing or new issues become permanent and material, leading to weakened financial metrics and an impairment of resiliencies, DBRS Morningstar could take a negative rating action.

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.

DBRS Morningstar will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving this report, contact us at info@dbrsmorningstar.com.

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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