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 (the Bonds) rating of Hospital Infrastructure Partners (NOH) Partnership (ProjectCo) at BBB (high), with Stable trends. 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 the Halton Health Services Corporation (HHS). The Bonds mature six months before the last payments under the Project Agreement (PA) and include standard protection features, such as a six-month debt service reserve account, a distribution test requiring a minimum debt service coverage ratio (DSCR) of 1.15times (x) on an historical and prospective basis, and additional senior indebtedness subject to the Bondholders’ approval.

The ratings confirmation is supported by the reduction in failure points, with no warning and monitoring thresholds being breached or notices issued in the last 12 months ended September 30, 2021. All deductions have been passed down to the service provider, EllisDon Corporation. Similarly, Bondholders are insulated by the same pass-down mechanism. As of September 30, 2021 (nine months year to date), Warning failure points totalled 114,636, down 41% from the same period in 2020, and Monitoring failure points totalled 339,972, down 40%. Failure points were higher in the first nine months of 2020 mainly because of the method used to report the failure; a switch was made from hourly trend data to specific event-based reporting. The service provider had agreed to absorb the financial impact and has since resolved the issue. Correspondingly, deduction amounts were approximately 25% lower in the first nine months of 2021 compared with the same period in 2020.

In addition to managing operational issues to avoid failure-point threshold breaches, the potential magnitude of Energy Painshare deductions had also been previously identified as a factor that contributed to the Project remaining Under Review with Negative Implications until December 2018, at which time the rating was confirmed. In discussion with HHS and Infrastructure Ontario, ProjectCo was provided with an indication that the Energy Painshare deductions would be modest in relation to the liability cap under the service agreement. In 2020, Energy Painshare/Gainshare for Energy Years 1 and 2 were approved and submitted, both having Painshare amounts passed down to the service provider. Discussions are ongoing between the parties with regard to Energy Years 3 or 4. The service provider has invested in certain energy efficiency initiatives at the facility, so savings and smaller Painshare deductions are expected for years 3, 4, and beyond.

As per the service contract, the Lender's Technical Advisor (LTA) conducts a lifecycle audit to review the building's condition five years after Substantial Completion and approximately two years thereafter. If the condition of the facility is assessed to be less than required under the PA, the service provider must propose a recovery plan and must repay amounts invoiced for the work planned but not properly performed. The LTA has prepared the report, which is being reviewed, and is expected to be submitted to lenders before year end.

DBRS Morningstar notes that the overall failure points level has 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 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 1.25x.

Continued and sustained reductions in failure points along with a final agreement on Energy Gainshare/Painshare deduction calculations 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 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.

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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