DBRS Morningstar Confirms Accès Recherche Montréal L.P. at “A,” Stable Trend

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating and Senior Secured Debt rating of Accès Recherche Montréal L.P. (ProjectCo) at “A” with Stable trends. ProjectCo is the special-purpose vehicle (SPV) created by Axium Recherche L.P. and Meridiam Infrastructure (SCA) SICAR (Meridiam) to design, build, finance, and maintain a 68,431-square metre research centre (the Project) under a 33.3-year public-private partnership (PPP) with Centre hospitalier de l’Université de Montréal (CHUM or the Hospital), one of the Province of Québec’s (Québec or the Province; rated AA (low) with a Stable trend by DBRS Morningstar) largest health-care institutions.

The Project has been in operation for 10 years and has performed relatively well, with the incurrence of failure points well below the contractual thresholds. The Lenders’ Technical Advisor (LTA) noted in its most recent operational report, dated January 2023, that the Project has generally reached a steady state of operation, and the failure points and deductions to date have been relatively minor. Furthermore, the facility remains in good condition, and the service provider, Honeywell Limited (Honeywell; a subsidiary of Honeywell International Inc. (rated “A” with a Stable trend by DBRS Morningstar)), appears to be managing the operation, maintenance, and lifecycle of the facility appropriately. There were, however, some unexpected lifecycle works in 2021 related to construction defects, such as the vibration issue with the exhaust fans and the corrosion issue with the plumbing pipes, that had to be completed earlier than expected. Honeywell fully funded the associated lifecycle costs, and the degasser installed to correct the premature corrosion of the plumbing pipes has been working successfully for almost three years. The LTA considers the risk of future failure to be low.

Conversely, the LTA noted that the construction defect of the vibration issue with the high plume laboratory exhaust fans on the rooftop of the facility remained unresolved at the time of the report. However, ProjectCo indicated that the Design-Build (DB) Contractor will fully fund the replacement cost of all the exhaust fans and has engaged an engineering consultancy to investigate solutions, while Honeywell is also providing its technical expertise. A solution for the replacement of high plume exhaust fans for the laboratory and animal lab has been designed and submitted to the City of Montréal for permitting purposes. The work could be performed during 2024 or 2025, and it would need several months to be completed. At present, the exhaust fans remain fully operational and no notable failures have occurred. More importantly, there is redundancy in place to allow Honeywell to perform any repair to any affected fans without breaching the contractual performance requirement.

The Project has reported lower-than-targeted energy consumption in each year since the start of Energy Year 1 in 2017, resulting in energy gainshare amounts that were passed down to Honeywell. Energy consumption in 2023 (Energy Year 7) YTD was 8.2% below target. Despite the energy savings realized over the past several years, Honeywell continues to investigate and implement energy saving opportunities during the reporting period. These include measures on major fans located on the roof of the facility, which represent significant energy consumption, and opportunities to reduce lighting consumption as part of lifecycle projects.

ProjectCo achieved annual debt service coverage ratios (DSCRs) of 1.40 times (x) in June 2023 and December 2022. The higher-than-expected DSCRs were the result of a lower SPV cost than what was projected in the financial model. In accordance with the financial model at financial close, DBRS Morningstar expects the Project to continue to generate a minimum DSCR of 1.37x in the operating phase with projected strong operating and maintenance and lifecycle resiliencies of 127% and 115%, respectively.

DBRS Morningstar could take a negative credit rating action if the Project experiences significant operational challenges that result in a material accumulation of failure points or deductions. An upgrade to the credit ratings is unlikely in the near term as the Project’s operating and financial metrics are commensurate with the credit rating category.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/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/416784 (July 4, 2023).

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

DBRS Morningstar applied the following principal methodology:
-- Global Methodology for Rating Public-Private Partnerships (August 30, 2022) https://www.dbrsmorningstar.com/research/402155

The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

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 .

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 credit rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for this credit rating action.

DBRS Morningstar had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is a solicited credit rating.

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.

Information regarding DBRS Morningstar ratings, including definitions, policies, and methodologies, is available on www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.

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