DBRS Morningstar Confirms SNC-Lavalin Innisfree McGill Finance Inc. at A (low) with Stable Trends

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating, the Series A Senior Amortizing Bonds rating, and the Series B Senior Amortizing Bonds rating of SNC-Lavalin Innisfree McGill Finance Inc. (the Issuer), the financing vehicle unconditionally guaranteed by McGill Healthcare Infrastructure Group, G.P. (ProjectCo) and its General Partners, at A (low) with Stable trends. ProjectCo is the special-purpose vehicle responsible for the design, construction, financing, and maintenance of a new 217,500 square metre hospital under a 34.3-year public-private partnership (the Project) with McGill University Health Centre/Centre universitaire de santé McGill (the Hospital; rated AA (low) with a Stable trend by DBRS Morningstar). The Hospital achieved Global Substantial Completion on November 5, 2014.

DBRS Morningstar notes the improved service performance in the Hospital to date, since the finalization of the amendments to the operating and maintenance (O&M) Contract and the implementation of the performance protocols in 2018. For the 12-month reporting period from October 2021 to September 2022, relatively low Hospital-levied deductions were related to service performance after the revised Project Agreement (PA) tolerances were applied. Furthermore, failure-point accumulation is well within PA thresholds for warning notices, subcontractor replacement, and Events of Default (EODs), with failure points at 0% of both the Service Provider-replacement threshold and EOD threshold. Discussions related to the renewal of the security contract for facility security services are ongoing, and the issue is expected to be resolved in the first half of 2023. Performance deductions are passed down to SNC-Lavalin O&M Inc. (SNC O&M or the Service Provider) from ProjectCo.

The energy consumption in the previous reporting period resulted in no gainshare/painshare payment between the Hospital and ProjectCo (Energy Year #5 (December 2020 to November 2021)). Energy Year #6 (December 2021 to November 2022) is on track for no gainshare or painshare payment as energy consumption is expected to meet the consumption target.

Budgeted lifecycle costs for the near term include interior finishes as well as mechanical and electrical replacement, including heating systems, the HVAC system, and electrical distribution, along with communications and security equipment. Starting from the fifth year following commencement of the operational term (2018–19), both SNC O&M (for architectural elements of the Hospital) and Johnson Controls L.P. (JCLP) (for technical elements of the Hospital) are required to deliver an Annual Lifecycle Report to ProjectCo. The Facilities Management Services Contract and subcontract include a mechanism to review the lifecycle budgets against the actual spending and forecast lifecycle activities, allowing ProjectCo to retain funds from SNC O&M and JCLP if there is a discrepancy. Following a review of JCLP’s sixth-year lifecycle report, ProjectCo currently retains $5.72 million ($4.1 million in 2021) of scheduled payments identified as being in excess of works performed.

The debt service coverage ratio was 1.34 times (x) for the trailing 12 months ended June 30, 2022, compared with the projection of 1.27x. Negative rating pressure could result if the Project exhibits material deterioration of its operating and financial performance, leading to weakened credit metrics, whereas there is limited credit upside at the current ratings of A (low) with Stable trends.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no environmental, social, and governance factors that had a significant or relevant effect on the credit analysis.

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/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (May 17, 2022).

Notes:
All figures are in Canadian dollars unless otherwise noted.

The principal methodology is Global Methodology for Rating Public-Private Partnerships (August 30, 2022; https://www.dbrsmorningstar.com/research/402155), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

A description of how DBRS Morningstar analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/397223/interplay-of-global-corporate-finance-rating-methodologies-when-analyzing-corporate-finance-transactions.

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.

The conditions that lead to the assignment of a Negative or Positive trend are generally 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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