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Global Credit Research - 12 Dec 2017
CAD1,370 million of rated debt affected
New York, December 12, 2017 -- Moody's Investors Service (Moody's) said today that Collectif
Sante Montreal S.E.C's (Project Co) Baa2 senior secured
rating and negative outlook will not be impacted by the intended change
in the construction company responsible for the Phase 2 of the project
as we view the change, in and of itself, to be credit neutral
in the short-run with credit positive attributes longer term.
Project Co is proposing a transaction that would result in the existing
contractor, a joint venture between Obrascon Huarte Lain (OHL,
B3, ratings under review for upgrade) and Laing O' Rourke,
no longer being responsible for Phase 2 of the project. Instead,
Pomerleau Inc., a Quebec based construction company,
would become the constructor for Phase 2 while the Phase 1 constructor
would remain responsible for all remaining Phase 1 obligations such as
minor deficiencies, deferred works, warranties, latent
defects etc. While Phase 1 lenders (the only lenders to the project)
are not directly exposed to Phase 2 risk, Moody's based our
assessment on whether the proposed transaction could either a) result
in stranded obligations for Project Co or reduced rights and benefits
under the two construction agreements compared to the existing construction
contract; or b) result in additional strain on the relationship between
Project Co and the Centre Hospitalier de l'Universite de Montreal
(CHUM, the Authority) if Phase 2 is delayed or is problematic.
Overall, we believe that the proposed transaction is credit neutral
to even somewhat credit positive for Project Co for the following reasons:
- The two phases will now become clearly delineated and separate
although there are some interfaces which seem to be well addressed in
the proposed documents;
- The proposed documentation seems to be clear as to the allocation
of responsibilities between the parties, with Pomerleau taking on
all the risks of Phase 2 (unless created by the Phase 1 constructor in
which case Pomerleau's recourse will be solely against the Phase
1 constructor and Phase 1 constructor has posted some security for the
benefit of Pomerleau to deal with that eventuality); In the meantime,
the Phase 1 constructor is clearly responsible for the remaining Phase
1 obligations as well as the energy model for the project;
- The proposed transaction also results in incremental security
on an aggregate basis for the benefit of Project Co, and more specifically,
a better division of security intended to back the remaining possible
Phase 1 issues versus possible Phase 2 issues as well as a more robust
security against subcontractor liens. We note that subcontractor
liens are still elevated which represent an additional risk for Project
Co unless properly addressed and secured. Moody's understand
that progress has been made to address these liens and the proposed security
from the Phase 1 constructor will specifically address the remaining liens;
- We understand that CHUM is supportive of the transaction as it
has an established relationship with Pomerleau who built the research
centre (Acces Recherche Montreal, A1 stable) a few years ago for
CHUM on time and budget;
- Pomerleau is a well-established construction company in
Montreal with a good track record in P3 and health facilities.
It also has a strong understanding of the local sub-contractor
market, utilities, construction codes and other critical elements
of the project. Phase 2 is not as complex and large as Phase 1
being only offices, an ambulatory care facility and an auditorium
with a construction price that is just 25% of the overall project
price. That said, Phase 2 is a fairly large project for Pomerleau
to undertake on its own;
- Pomerleau is posting solid liquidity and security against its
Phase 2 obligations, and we note that none of that liquidity is
needed to service Project Co debt since the latter is fully serviced from
current availability payments made by CHUM with respect to Phase 1.
The negative outlook remains unchanged as Collectif Sante Montreal has
not yet achieved final completion of Phase 1 and final completion may
not be reached until spring 2018 when a very complex building management
system is expected to be finalized. We further note that the project
has underperformed since reaching substantial completion in March 2017
causing failure points to accumulate fairly rapidly in the last couple
of months. In that regard, if performance does not turn around
or if a solution is not found between the parties to recognize the delay
in the delivery of the building management system, failure points
could accumulate to a level where an event of default under the project
agreement could be declared, giving CHUM the right to terminate
the project agreement. Mitigating this underperformance is the
fact that the failure points associated with deductions have all passed
been down to the Phase 1 constructor, whose payment obligations
are supported by letters of credit and, to a lesser degree,
to the service provider so that the cash flow implications to Project
Co remains unaffected by this underperformance. While this recent
performance is credit negative, we note that parties continue to
work cooperatively to address various issues, and as such,
as long as progress is made to reach final completion of Phase 1,
we believe that the Authority would not declare a project agreement termination
even if failure points reached the default levels. However,
should that assumption be proven incorrect, the potential for a
multiple notch rating change might emerge.
WHAT COULD CHANGE THE RATING UP/DOWN
To that point, the rating could be downgraded if the Authority indicates
any intention to terminate the project agreement as a result of either
delays in completing Phase 1 of the project or operating performance issues.
Other possible triggers for a downgrade could be the weakening of the
credit quality of the key parties involved in the project.
Conversely, while positive rating pressure in the near-term
is unlikely, an upgrade could be considered should final completion
of Phase 1 be reached in the early part of 2018, failure points
and deductions decrease to the level that is expected of an operator such
as Veolia, sub-contractor liens are reduced to an immaterial
level, and should Phase 2 proceed as planned.
Collectif Santé Montréal S.E.C is a special
purpose entity which in June 2011 issued CAD1.37 billion of senior
secured amortizing bonds in order to mostly fund the design and construction
of a new healthcare facility in downtown Montréal, Canada.
The new facility, when built, will combine three existing
hospitals into one new hospital. Phase 1 reached substantial completion
in March 2017. As well, Collectif Santé Montréal
S.E.C. will maintain and operate the facility until
This publication does not announce a credit rating action. For
any credit ratings referenced in this publication, please see the
ratings tab on the issuer/entity page on www.moodys.com
for the most updated credit rating action information and rating history.
Catherine N. Deluz
Senior Vice President
Project Finance Group
Moody's Canada Inc.
70 York Street
Toronto, ON M5J 1S9
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Associate Managing Director
Project Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
No Related Data.
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