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

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating and the rating on the Series 2 Senior Bonds (the Bonds) of Rainbow Hospital Partnership (ProjectCo) 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 by DBRS Morningstar) 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).

Final completion was achieved on June 23, 2016, and the Project is in the seventh year of a 30-year service phase ending on October 15, 2044. During the operations period, all risks and responsibilities with respect to maintenance and rehabilitation tasks under the PA are passed down to SNC-Lavalin O&M Inc. (the Service Provider). On November 6, 2020, DBRS Morningstar downgraded ProjectCo’s Issuer Rating and the rating on the Bonds to BBB (high) from A (low) and changed the trends to Stable from Negative as a result of the downgrade of the Service Provider Guarantor’s Issuer Rating and Senior Debentures rating to BB (high) from BBB (low) on November 2, 2020. Currently, DBRS Morningstar does not give credit to the risk transfer to the Service Provider because the performance guarantee is from a non-investment-grade entity.

ProjectCo withdrew its Force Majeure Notice to the Province related to the Coronavirus Disease (COVID-19) pandemic on September 11, 2020, because there has not been any material impact on the performance of the Project. DBRS Morningstar understands the withdrawal of the notice does not prohibit ProjectCo from issuing subsequent Force Majeure Notice in the future if required because of the ongoing pandemic.

The Project's operating performance has steadily improved in the last couple of years. Total failure points in 2020 decreased by about 11% compared with 2019. The failure points incurred in the first three months of 2020 were related to a defective valve that caused the humidity level in the information desk to fall below that of the contractual threshold. After the valve was replaced, ProjectCo indicated that the humidity issue has not recurred and it did not incur any further failure points for the remainder of the year.

ProjectCo indicated that the dispute between the Province and the designer-build joint venture (DBJV) with respect to the door pivot issue remains outstanding. The Province has applied four months of deductions of about $110,000 since January 2020 and withheld the amount from the monthly service payments. DBRS Morningstar understands that there are ongoing discussions between the Province, ProjectCo, and the DBJV to resolve this issue. The Province has suspended applying deductions for the month of February 2021. Although the DBJV has yet to pay the deduction amount to ProjectCo, the withheld amount from the monthly service payments has not had a material impact on the debt service coverage ratio (DSCR) at this time. However, DBRS Morningstar notes that, if an agreement cannot be reached and the Province resumes applying deductions, it could compress the DSCR this year. Nonetheless, DBRS Morningstar typically weighs the lifecycle and operating and maintenance (O&M) resiliencies more heavily than the DSCR and, as a result, even if the DSCR is materially lower this year, the overall financial risk assessment remains supportive of the current rating.

DBRS Morningstar also notes that ProjectCo issued a Notice of Dispute to the Province in February 2021 with respect to the incidents that occurred at the facility where patients deliberately damaged the facility. ProjectCo claims that these events fall under the Excusing Causes provision under the PA and is seeking compensation for all the direct expenses incurred in the last several years.

Notwithstanding the ongoing disputes, there is an open dialogue between the DBJV, the Service Provider, and the Province, and ProjectCo is of the opinion that, in general, the working relationship is good.

As per the latest compliance certificate, DSCR for the 12-month period ended December 31, 2020, was 1.24 times (x) (including three months of deductions applied for the door pivots). For the next 12 months (ending December 31, 2021), ProjectCo expects the DSCR to be 1.23x.

DBRS Morningstar believes a positive rating action is unlikely in the near term. A negative rating action may result if the Project’s operating performance deteriorates materially, leading to an accumulation of failure points that could potentially trigger various contractual thresholds.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

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

The principal methodology is Rating Public-Private Partnerships (August 19, 2020; https://www.dbrsmorningstar.com/research/365975 ), which can be found on dbrsmorningstar.com under Methodologies & Criteria. Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021; https://www.dbrsmorningstar.com/research/373262).

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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