DBRS Morningstar Confirms Plenary Health Care Partnerships Humber LP’s Ratings at A (low) With Stable Trends

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating and the Series A and Series B Long-Term Senior Bonds ratings of Plenary Health Care Partnerships Humber LP (ProjectCo) at A (low) with Stable trends. ProjectCo is a special-purpose vehicle (SPV) created to design, build, finance, and maintain a new 1.7 million-square-foot (sf) hospital facility (the Project) in northwestern Toronto under a 33.6-year Project Agreement (PA) with Humber River Hospital (HRH or the Hospital). The Project is in its 82nd month of the 30-year service phase after achieving substantial completion on May 11, 2015.

From February 24, 2021, to February 26, 2021, there were multiple power interruptions to the facility, which led to HRH notifying ProjectCo, by letter dated July 5, 2021, that it formally disputes the failure points calculation of the Code Gray (power interruption) incidents. Ongoing discussions have been taking place to resolve the reporting disagreement since the dispute letter was received. On February 17, 2022, the Hospital furnished a letter to ProjectCo alleging that the six-month failure point threshold for the Plant Services and Management Category was breached as a result of the February 2021 power interruptions, which, pursuant to the PA, allows the Hospital to force replacement of a poorly performing Service Provider. While the Hospital alleges that the accrual of failure points in excess of the threshold allow it to exercise its rights to compel replacement of the Service Provider, and that ProjectCo is to provide to HRH a remedial plan proposal for interim management or provision of Services within five business days of receiving the letter, HRH has agreed to toll the deadlines pursuant to the PA. Furthermore, HRH indicates in the communication that it will provide ProjectCo 10 business days' notice when it intends to end the tolling deadline period. DBRS Morningstar notes that the letter indicates that it does not believe that Service Provider performance is the cause of ongoing facility issues. ProjectCo believes that HRH does not have the discretion it is presently asserting to issue the notice since the alleged failures points are under dispute and therefore not yet accrued under the definitions of the PA.

ProjectCo contends that it has rectified valid noncompliances and nonconformities to date and will take necessary steps to correct any newly identified concerns. ProjectCo is in the process of engaging a third-party consultant to validate and clarify HRH alleged ongoing facility issues as part of a Building Conditions Assessment and further steps will be taken subsequent to the third-party findings accordingly. DBRS Morningstar expects that once the issues and noncompliances are validated that appropriate steps will be taken to expeditiously rectify any deficiencies. DBRS Morningstar continues to monitor the progress of discussions related to the pending disputes. Deductions related to the service phase have been fully passed down to the Service Provider without causing financial impact to ProjectCo.

The debt service coverage ratio per the compliance certificate for November 30, 2021, was 1.23 times (x), slightly lower than the forecast of 1.25x but higher than the minimum of 1.15x, mainly the result of higher insurance costs and advisory fees. DBRS Morningstar could take a negative rating action if discussions with HRH on disputed items become prolonged, service performance deteriorates with high levels of failure points or deductions, new disputes with the Hospital negatively affect the operating environment, or if any other material adverse development occurs. A positive rating action is not expected in the short term.

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), 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 (https://www.dbrsmorningstar.com/research/373262; February 3, 2021).

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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