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Announcement:

Moodys: Collectif Sante Montreal's Baa2 rating and negative outlook not impacted by planned change of construction company for Phase 2

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.

RATINGS RATIONALE

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.

RATING OUTLOOK

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 March 2050.

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
Suite 1400
Toronto, ON M5J 1S9
Canada
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

A.J. Sabatelle
Associate Managing Director
Project Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
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JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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