DBRS Morningstar Confirms Integrated Team Solutions SJHC Partnership at A (low) with Stable Trends

DBRS Limited (DBRS Morningstar) confirmed Integrated Team Solutions SJHC Partnership’s (ProjectCo) Issuer Rating and the rating of ProjectCo’s Series A Senior Bonds at A (low) with Stable trends. ProjectCo is the special-purpose entity created to design, build, finance, and maintain two new mental health facilities in London and St. Thomas, Ontario (the Project), under a 32-year project agreement (PA) with St. Joseph’s Health Care London (SJHC).

The Project had multiple water leaks in 2019–20, which led to a rise in failure points. ProjectCo indicated that the water leaks were relatively minor and that the Service Provider, Honeywell Limited (Honeywell), has rectified the issue by replacing the affected valves and repairing the damaged drywall and ceiling tiles. Furthermore, Honeywell is implementing some preventative measures such as caulking and sealing the bathroom sinks to prevent further water leaks. DBRS Morningstar understands that Honeywell has also increased the frequency of visual inspection of patient rooms to a quarterly basis. Although there has been a notable increase in failure points related to plant and utilities management services, the monthly failure points related to plant and utilities management services incurred for the year ended February 28, 2021, remain about 61% (monthly average) and 53% (three-month rolling average) below that of the warning and monitoring notice thresholds, respectively. Total failure points incurred remain well below the various event-of-default thresholds. All associated deductions were fully passed down to Honeywell.

Since the beginning of the Coronavirus Disease (COVID-19) pandemic to the date of this press release, the Project has not experienced any material impact on operations, and ProjectCo did not submit a formal relief request under the PA. In March 2020, ProjectCo notified the Indenture Trustee and SJHC that it may seek relief under the PA related to the coronavirus pandemic. ProjectCo indicated that it has not withdrawn the notification because the pandemic remains ongoing. At present, Honeywell is following health and safety protocols and does not have staff travelling between the London and St. Thomas sites.

The Project's energy consumption for the year ended January 31, 2021 (Energy Year 6), is expected to be lower than target, resulting in energy gainshare this year. In accordance with the Service Contract, any energy gainshare or painshare adjustment will be passed down to Honeywell.

A lifecycle audit was completed by the Lenders' Technical Advisor (LTA), and a lifecycle audit report was issued in June 2020. The report covers the first five years from substantial completion in November 2014, up to and including 2019. The lifecycle audit report is largely based on the Joint Technical Review (JTR) completed by the Service Provider through Morrison Hershfield. JTR is a condition assessment of the facilities, not dissimilar to the requirements of the lifecycle audit, and is required under the PA. In the lifecycle audit report, the LTA noted that the defects identified in the JTR (e.g., staining and efflorescence at brick walls, air leakage, premature degranulation of roof membrane, subgrade failure and settlement at the parking lot) were not construction defects but rather lifecycle audit rectifications in accordance with the Service Contract. The LTA recommended that Honeywell rectify these deficiencies by June 30, 2022, and provide ProjectCo with a letter of credit (LOC) for each facility ($1.7 million for London and $240,000 for St. Thomas) if it is not able to fully rectify by the deadline. Furthermore, the LTA indicated that the condition of the facilities is excellent (even with the defects) and that the defects are not considered urgent to impact the operations or the overall condition prior to June 30, 2022.

The LTA also identified that there was some minor deferred lifecycle work (e.g., repainting lockers and refurbishing benches) at both facilities for which Honeywell has already received the lifecycle payment. As per the Service Contract, Honeywell is required to provide ProjectCo with an LOC for the amount of any deferred lifecycle works as a condition precedent to payment. ProjectCo has requested that Honeywell provide an LOC for the deferred lifecycle works, and, in the event that this does not happen in a timely manner, ProjectCo will withhold the amount from future lifecycle payments. DBRS Morningstar notes that the amount of the deferred lifecycle work at both facilities is relatively minor compared with the cost of the deficiencies.

The Project’s debt service coverage ratio (DSCR) for the year ended February 28, 2021, was 1.20 times (x), which was lower than the projected DSCR of 1.21x because of lower interest income. Operating and maintenance and lifecycle resiliencies remain in line with the financial-close financial model at 47% and 43%, respectively. For the next 12 months, the DSCR is expected to be 1.21x.

DBRS Morningstar could take a negative rating action if the Project’s operating performance deteriorates materially, leading to an accumulation of failure points that could potentially trigger various contractual thresholds. Because of the fixed-price service contract, there is limited upside on the Project’s financial metrics that would support a positive rating action.

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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