DBRS Morningstar Confirms Plenary Health Bridgepoint LP at “A” With a Stable Trend

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating and Senior Amortizing Bonds (Series A) rating of Plenary Health Bridgepoint LP (ProjectCo) at “A.” All trends are Stable.

ProjectCo is the special-purpose vehicle created to design, build, finance, and maintain a new 472-bed hospital (the Project) in Toronto and refurbish the adjacent historic Don Jail for administrative purposes under a 33.6-year Project Agreement with Bridgepoint Hospital (the Hospital), one of the Province of Ontario’s (rated AA (low) with a Stable trend by DBRS Morningstar) largest complex-care institutions. ProjectCo’s responsibilities during the service phase have been largely passed down to Johnson Controls Canada LP (JCLP) under an indexed fixed-price contract.

For the 12 months ended September 30, 2021, the total number of failure points and associated deductions incurred by ProjectCo increased compared with the same period in 2020. DBRS Morningstar notes that the increase in failure points and associated deductions was mainly attributed to the increase in elevator downtime in August 2021 and September 2021. The root cause of the elevator failure was a power surge that affected multiple components of the elevator. The duration of the downtime (10 days in August 2021 and about nine days in September 2021) was caused by a combination of troubleshooting time and longer lead time in sourcing replacement parts. ProjectCo indicated that the affected elevator is now back in service and the issue has not recurred. Prior to those events, ProjectCo did not incur any deductions from October 2020 to July 2021. Despite the increase in the total number of failure points, it remains well below the Facilities Management (FM) Contract's warning notice and monitoring notice thresholds. Moreover, there was no financial impact on the Project because the deductions were fully passed down to JCLP.

ProjectCo indicated that the condition of the facility remains relatively good and the lifecycle spending has been in line with the financial model at financial close. Furthermore, ProjectCo noted that the actual energy consumption for the year ended June 30, 2021, is expected to be lower than the annual target level and the associated energy gainshare will be passed down to JCLP.

Since the beginning of the pandemic, the Project has not been materially affected by the various health and safety measures and protocols as all the operating and maintenance (O&M) activities have continued uninterruptedly. The mandated temporary closures of multiple retail spaces (non-essential workplaces) in the facility from March 2020 through June 2020 reduced ProjectCo’s rental income. ProjectCo issued a Notice of Excusing Cause to the Hospital at the end of March 2020 seeking relief (from any performance failures and failure points associated with retail space and retail food) and compensation (forgone rental income) associated with the temporary measures that it implemented in response to the pandemic. DBRS Morningstar understands that, although the Hospital has yet to approve the relief and compensation, the forgone rental income represents less than 1% of the monthly service payment, which is immaterial. Moreover, ProjectCo did not incur any deductions or failure points associated with retail space and retail food. At present, the retail revenue remains below the pre-pandemic level because of the ongoing Hospital-imposed access restrictions that have reduced retail foot traffic. However, DBRS Morningstar considers the financial implications to be relatively minor.

For the last 12 months ended August 31, 2021, ProjectCo’s senior debt service coverage ratio (DSCR) was 1.19 times (x). The lower-than-expected senior DSCR was a result of the lower-than-expected interest income and retail revenue, and slightly higher-than-expected insurance cost. ProjectCo is projecting a senior DSCR of about 1.18x for the year ending August 31, 2022. Although the projected senior DSCR is below what was projected at financial close, ProjectCo does not believe the senior DSCR will stay below 1.20x on a sustained basis once retail revenue and interest income return to pre-pandemic levels. In DBRS Morningstar's view, the break-even ratios carry more weight in the Project's financial risk assessment. Therefore, ProjectCo’s O&M and lifecycle resiliencies of 78% and 87%, respectively, are considered strong for the ratings and provide it with more capacity to absorb any potential O&M and lifecycle cost increases.

DBRS Morningstar could take negative rating action if ProjectCo experiences material operational challenges resulting in a material accumulation of failure points on a sustained basis. DBRS Morningstar believes a positive rating action is unlikely given the fixed revenue stream from the Hospital and the fixed-priced FM Contract with JCLP.

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).

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.

The full report providing additional analytical detail is available by clicking on the link under Related Documents below or by contacting 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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