DBRS Morningstar Confirms Health Montréal Collective Limited Partnership/Collectif Montréal Santé S.E.C. at BBB (low) with Negative Trends

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating of Health Montréal Collective Limited Partnership/Collectif Montréal Santé S.E.C. (ProjectCo) and the rating of the $1,371 million Senior Secured Bonds at BBB (low). All trends remain Negative. ProjectCo is the special-purpose vehicle created to design, build, finance, and maintain a new 772-bed healthcare facility (the Project) under a 38.8-year public-private partnership with the Centre Hospitalier de l’Université de Montréal (CHUM or the Hospital) under the Project Agreement (PA).

Phase 2 reached Substantial Completion on April 16, 2021, ahead of the contractual substantial completion date of May 11, 2021. The Phase 2 scope of works was performed by Pomerleau Inc. and includes an ambulatory site, administrative building, auditorium, and parking facilities. Minor deficiencies identified by the Independent Certifier (IC) at Phase 2 Substantial Completion were valued at $2 million. As of the end of September, the outstanding value of minor deficiencies was reduced to $383,000 (20%), and the remaining items are expected to be completed in Q1 2022.

However, tensions between ProjectCo and the Hospital persist as a result of delayed completion and certification of Phase 1 deferred works and the alleged deficiencies related to the completion of variation directions/change orders issued by the Hospital. ProjectCo received an additional Notice of Default on January 26, 2021, in which the Hospital alleged there was a failure to complete variation/change order works that purport to have a materially adverse impact on the performance of the clinical and nonclinical activities of the Hospital. The allegations relate to failures and deficiencies in the pneumatic transportation system (PTS), the snow-flushing ventilation system, the Code Gray BMS Alarm system, the Chiller Interlocks, and the Ventilation Cross-Contamination HVAC system. ProjectCo has completed and submitted the engineering plan for the works for approval to be completed for all directives, with the exception of the PTS directive (scheduled to be completed by the end of the year).

Of the deferred work, only the flexible duct work remains to be done, which is expected to be completed in December 2021. ProjectCo submitted the construction joint-venture's (CJV) Travaux Reportés (TR-3; the third and final milestone of the deferred works) application to the IC on July 26, 2021. The IC notified ProjectCo on September 3, 2021, that the TR-3 conditions were not achieved. The Hospital responded with an Event of Default letter stating that ProjectCo needed to provide rectification measures within five business days of receipt of the IC's opinion on TR-3 and alleged that the delay in providing rectification measures would have a materially adverse impact on the performance of the Hospital's clinical and nonclinical activities. ProjectCo issued a formal Notice of Dispute on September 27, 2021, disputing CHUM’s allegation on the grounds that ProjectCo’s obligation was not triggered because the IC’s report was materially deficient and inconclusive. Although ProjectCo has issued a formal dispute, no Party Representatives have been called upon. DBRS Morningstar notes that ongoing discussions and workshops are being held to clarify with the IC the extent of the deficiencies in certification that will need to be addressed to achieve final certification.

Although there are no specific default or termination right provisions associated with the delay in completion and certification of the TR-3 deferred works under the PA, CHUM; the CJV's Phase 1 Contractor; and ProjectCo continue to complete any of the Hospital's requests. The tension between ProjectCo and the Hospital as a result of alleged deficient and incomplete works continues to place pressure on the contractual relationship that, DBRS Morningstar believes, has the potential to affect the performance and financial metrics going forward. Furthermore, once the TR-3 is successfully certified and all outstanding issues are resolved, DBRS Morningstar expects that the relationship between CHUM and the major project parties could take some time to normalize.

The debt service coverage ratio is projected to be 1.25 times, with the first reporting period under the Master Trust Indenture being September 30, 2022. DBRS Morningstar could take negative rating action if ProjectCo does not complete the remaining deferred works in a timely manner or if CHUM takes further undisputed legal action. Successful certification of the outstanding deferred works or a sustained improvement in the contractual relationship between the Hospital and ProjectCo, along with a period of good service performance, could lead to 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).

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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