DBRS Morningstar Confirms Accès Recherche Montréal L.P. at “A” With a Stable Trend

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating and Senior Secured Debt rating of Accès Recherche Montréal L.P. (ProjectCo) at “A” with Stable trends. ProjectCo is the special-purpose vehicle (SPV) created by Axium Recherche L.P. and Meridiam Infrastructure (SCA) SICAR to design, build, finance, and maintain a new 68,431-square metre research centre (the Project) under a 33.3-year public-private partnership with Centre hospitalier de l’Université de Montréal (CHUM or the Hospital), one of the Province of Québec’s (the Province; rated AA (low) with a Stable trend by DBRS Morningstar) largest healthcare institutions.

The Project has been in operation for more than eight years and has performed relatively well. Despite a sharp uptick of failure points and deductions for the rolling 12 months ended August 31, 2021, compared with the same period last year, most of the failure points incurred were related to two elevator events that required an extended shutdown for several days in early 2021. DBRS Morningstar understands that the elevators were repaired by replacing the pulley and the issue has not recurred. Furthermore, the incurrence of failure points remain well below the contractual thresholds. The Lenders’ Technical Advisor (LTA) noted in its most recent biannual operational report dated June 2021 that it does not consider the performance of the elevators a substantial risk for the project. To prevent the issue from reoccurring in the future, Honeywell Limited (Honeywell; a subsidiary of Honeywell International Inc. (rated “A” with a Stable trend by DBRS Morningstar)) is currently co-ordinating with the elevator maintenance provider and the manufacturer to proactively repair the other elevators. The LTA also noted that the Project has generally reached a steady state of operation, and the failure points and deductions to date have been relatively minor. Furthermore, the facility remains in good condition, and Honeywell appears to be completing most of the lifecycle activities in accordance with the lifecycle schedule. There were, however, some unexpected lifecycle works related to construction defects, such as the vibration issue with the exhaust fans and the corrosion issue with the plumbing pipes, that had to be completed earlier than expected. Honeywell fully funded the associated lifecycle costs.

The LTA noted that the construction defect of the vibration issue with the high plume laboratory exhaust fans on the rooftop of the facility remained unresolved at the time of the report. However, ProjectCo indicated that the Design-Build Contractor will now fully fund the replacement cost of all the exhaust fans, and the work is expected to commence around March 2022. At present, the exhaust fans remain fully operational and no notable failures have occurred. More importantly, there is redundancy in place to allow Honeywell to perform any repair to any affected fans without breaching the contractual performance requirement. Furthermore, the LTA considered the risk with respect to the premature corrosion of the plumbing pipes low after the permanent pretreatment solution was deployed (installation of the reverse osmosis system and the degasser) in 2020 to pretreat the steam before it enters the pipes in order to prevent further corrosion. ProjectCo indicated that no new leaks have been identified since the last leakage in the ceiling of the animal lab in 2018–19.

The Project has reported lower-than-targeted energy consumption in each year since the start of Energy Year 1 in 2017, resulting in energy gainshare amounts that were passed down to Honeywell. Energy consumption was on average about 8% below target in 2018–20. Despite the energy savings realized over the past several years, Honeywell is undertaking initiative to further reduce the overall energy consumption of the Project by implementing the steam system modification project (which will be fully funded by the Hospital) that will provide energy savings and increase the life expectancy of the equipment in the hot water system.

Although ProjectCo issued a Notice of Excusing Cause on March 26, 2020, with respect to the Coronavirus Disease (COVID-19) pandemic, Honeywell has continued to operate and maintain the Project without significant disruptions. It was able to navigate the pandemic without delaying response time for maintenance service. In the beginning of the pandemic, a coronavirus clinic was established in the facility for testing medical staff. This resulted in the hiring of six additional security guards, and the associated costs have been confirmed as a Variation and will be paid by CHUM. The coronavirus clinic extended its services to vaccination in January 2021 but is serving only medical staff and the patients of the Hospital. Overall, the LTA noted that Honeywell has taken measures to maintain operations of the facility in accordance with the policies and recommendations of the Province.

ProjectCo achieved annual debt service coverage ratios (DSCRs) of 1.40 times (x) and 1.39x in June 2021 and December 31, 2020, respectively. The higher-than-expected DSCRs were the result of a lower SPV cost than what was projected in the financial model. Furthermore, the Project’s debt-to-cash flow available for debt servicing in 2020 was about 7.9x. In accordance with the financial model at financial close, DBRS Morningstar expects the Project to continue to generate a minimum DSCR of 1.37x in the operating phase and strong projected operating and maintenance and lifecycle resiliencies of 127% and 115%, respectively.

DBRS Morningstar could take a negative rating action if the Project experiences significant operational challenges that result in a material accumulation of failure points or deductions. An upgrade to the ratings is unlikely in the near term as the Project’s operating and financial metrics are commensurate with the rating category.

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, 2021; https://www.dbrsmorningstar.com/research/383244), 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.

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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