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Rating Action:

Moody's Rates Access Justice Durham's Sr Sec bonds A1

27 Feb 2007
Moody's Rates Access Justice Durham's Sr Sec bonds A1

Approximately C$214 million of debt securities affected

Toronto, February 27, 2007 -- Moody's Investors Service announced today that it has assigned a senior secured rating of A1 to Access Justice Durham Ltd.'s (AJD) $214 million fully amortizing secured project bonds (Bonds). The rating outlook is stable.

AJD is a special purpose entity (SPV) that was formed to design, build and provide facilities management services to the Durham Consolidated Courthouse (DCC or the project). The DCC is one of a number of public infrastructure projects in Ontario that is being developed under the province's Alternative Financing and Procurement (AFP) strategy. The implementation of the AFP strategy is the responsibility of Ontario Infrastructure Projects Corporation (OIPC or Infrastructure Ontario). The DCC will be a 7 story courthouse of approximately 440,000 square feet containing 33 court rooms to be constructed on a brownfield site in the City of Oshawa. The DCC will be developed pursuant to the terms of the Project Agreement (PA) between AJD and Infrastructure Ontario, as agent for Her Majesty the Queen in Right of Ontario (HMQ). By the terms of the PA, AJD will be responsible for executing and funding the construction of the DCC (scheduled to be completed by the end of November, 2009) and will provide facilities management (FM) services from the date of operations commencement until the PA expiry date of November, 2039. During the Service Period, HMQ will make monthly availability-based service payments to AJD for the provision of the facility itself as well as the provision of FM services. The service payments have been structured to provide AJD with the opportunity to achieve a return on its capital investment.

The key project sponsor is Babcock & Brown Limited (B&B). On financial closing, which is expected to occur on or before February 28, 2007, 100% of AJD will be indirectly owned by Babcock & Brown Public Partnerships Limited (B2P2), an infrastructure fund listed on the London Stock Exchange and managed by Babcock & Brown. Other consortium members include PCL Construction Group Inc. (alone or together with its subsidiaries, PCL) and Johnson Controls L.P. (JCLP, a subsidiary of Johnson Controls Inc.). PCL's subsidiary, PCL Constructors Canada Inc., is responsible for designing and building the project under a fixed price/fixed schedule Design Build Agreement (DBA). JCLP will provide FM services to AJD under a 30-year Facility Management and Services Agreement (FMSA) that is coterminous with the PA. The contractual obligations of PCL under the DBA and JCLP under the FMSA are supported by security packages that include liquid security and limited parent guarantees. Virtually all of AJD's obligations under the PA are passed through to PCL and JCLP on a back-to-back basis under the DBA and FMSA. The obligations retained by AJD are primarily limited to the arrangement of financing, the procurement of certain insurance coverages and the administration of the SPV. The requirements of the DBA and FMSA are generally more restrictive than those of the PA, such that AJD is expected to have an opportunity to resolve any performance issues before they can trigger a termination of the PA. In addition, under the financing documents, the bondholders have the right but not the obligation to step-in and cure an AJD default and to delay the right of HMQ, PCL and JCLP to terminate their respective agreements.

The rating reflects a number of strengths including: i) the need for a new courthouse facility to consolidate a number of older and geographically dispersed facilities throughout the Durham Region; ii) the fact that AJD's construction risk is passed on to PCL through the DBA and supported by a strong construction risk mitigation package; iii) the expectation that stable, predictable cash flow from service payments under the long-term PA with HMQ will fully amortize the Bonds during the term of the PA; iv) the fact that the service payments are availability-based which insulates AJD from volume risk; v) the FM services do not include any prisoner handling responsibilities; vi) the FM specifications and related abatement regimes are considered by AJD's technical advisor to be reasonable and consistent with current industry standards; vii) the fact that AJD's FM obligations are substantially borne by JCLP on a back-to-back basis; viii) security provided by the JCLP in support of its contractual obligations to AJD; ix) AJD's cure provisions and bondholder step-in rights that are expected to provide reasonable opportunity to cure any default to prevent termination of the PA; x) PA termination payment provisions which, in conjunction with the other elements of the project and financing structure, are expected to provide for full repayment of the Bonds under most reasonably foreseeable circumstances; xi) an average DSCR of approximately 1.17x during the operations period based on AJD's base case financial projections; and xii) liquidity in the form of a debt service reserve in an amount equivalent to six months' scheduled principal and interest as well as the construction letter of credit provided by ABN AMRO (Construction LC). The rating also reflects the following credit weaknesses: i) the risk that abatement of the service payments for service failures and unavailability could impinge on AJD's ability to service its debt although Moody's believes that the structural elements of the transaction provide significant mitigation of this risk; ii) the existence of environmental contamination on the site although HMQ has assumed this risk and AJD is only responsible for environmental contamination caused by it; iii) the tight construction time table which the independent engineer, Stantec Consulting Limited, has characterized as achievable but aggressive; iv) the relatively short three month tail on the PA relative to the Bond maturity; and v) the existence of re-tendering risk if the FM subcontractor has to be replaced although this risk is somewhat mitigated by the existence of subcontractor security and periodic benchmarking/market testing of certain FM services.

In Moody's view, bondholder risk is greatest during the construction phase of the project. However, Moody's believes the construction obligations are somewhat simplified by the fact that the DCC will be developed on a site that is currently vacant. Furthermore, Moody's notes that PCL is one of Canada's largest and most experienced construction companies. The construction risk mitigation package includes liquid security and a limited parent guarantee provided by the DBA contractor, the use of an independent certifier and the Construction LC. The role of the independent certifier is to monitor the progress of construction and ensure that payments are made to PCL only for work actually completed and only to the extent that after any such payment, there will still be sufficient funds available to complete the project. Although the project site has been substantially remediated by HMQ, some further remediation is required and this remediation will not be completed prior to commencement of construction. Under the PA, HMQ is obligated to complete the remediation and indemnify AJD for direct losses incurred as a result of any contamination, other than contamination caused by AJD. The remediation completed to date has resulted in the over-excavation of the site and necessitated additional works to be undertaken by AJD. The cost of these works will be borne by HMQ and any schedule delays incurred by AJD as a result of the remaining environmental remediation or from addressing the over-excavation issue will be compensation events in respect of which HMQ will compensate AJD.

During the operating period, the relatively straight forward nature of the FM services to be provided, the experience of JCLP, the reasonable service payment abatement regime, the periodic benchmarking/market testing and repricing of certain services and credit quality of the PA counterparty (Ontario, Aa1) suggests that the risk that cash flows will not be sufficient to service the Bonds is low. As previously noted, the FMSA with JCLP requires that JCLP assume most of AJD's FM obligations under the PA subject to more restrictive default thresholds.

The PA is a key transaction document. While there are a number of scenarios under which termination can occur, there are essentially two mechanisms for calculating the amount of the termination payment to which AJD is entitled. The first mechanism (applicable to voluntary terminations by HMQ, HMQ default and Force Majeure) consists of a formula that provides for a payment to AJD from HMQ that is not less than all amounts due on the Bonds. The second mechanism (applicable to terminations for AJD default) allows HMQ to re-tender the PA, provided there is a liquid re-tendering market, and make a payment to AJD equal to the amount of the highest qualified bid price. In the absence of a liquid market, HMQ's termination payment is based on a calculation that considers the discounted value of future service payments less the discounted value of HMQ's estimated future costs including costs to complete, remedy any performance failures and operate the DCC. In the event of termination for AJD default during the construction period, termination payment risk centers on whether the construction risk mitigation package is sufficient to ensure that HMQ's costs to complete and/or increased operating costs do not exceed the project equity thereby causing the termination payment to be less than the full amount of the outstanding project debt. In the event of termination for AJD default during the operations period, termination payment risk centers on whether the combination of the discounted value of the equity portion of the service payments, together with the access to any applicable JCLP security, is sufficient to absorb any remedial costs, increase in operating costs, or variability in the received market tender amounts and ensure repayment of the Bonds in accordance with their terms. Moody's believes that the termination payment for AJD default should be adequate to ensure full repayment of the Bonds under the most reasonably foreseeable circumstances.

The Bonds have been fully underwritten by ABN AMRO and will be fully funded on financial close. The equity component of the transaction will be funded toward the end of the construction period in approximately August, 2009 pursuant to an Equity Purchase Agreement with an indirect subsidiary of B2P2. The equity purchase obligations are supported by a letter of credit from The Royal Bank of Scotland plc. The equity purchase obligations cannot be assigned unless the assignee is rated at least A1 or posts an unconditional and irrevocable letter of credit from an A1 issuer.

The Bonds will have a term of approximately 32 years and six months and will mature approximately 3 months prior to the November 23, 2039 scheduled expiry date of the PA. Bond payments will be made on a quarterly basis. The Bonds will pay interest only during the period ending 12 months following the November 24, 2009 Planned Completion Date and thereafter will be repaid in equal quarterly installments of principal and interest providing for full amortization by the maturity date. The Bonds will have the benefit of a debt service reserve account equivalent to six months' (two quarterly bond payments) scheduled principal and interest. The Bonds will be secured by i) mortgage security in all AJD assets including the Project Facilities and Accounts and ii) specific assignments of all Transaction Documents including the PA, the DBA and the FMSA; and iii) specific assignments of the security from PCL and JCLP. In addition, prior to project Completion, the bondholders benefit from the Construction LC provided by ABN AMRO which is intended to provide the bondholders with liquid security to cover debt service in the event of any delays in enforcing any other security. Upon successful completion of construction, the Construction LC will expire.

Access Justice Durham Ltd. is headquartered in Toronto, Ontario.

New York
Chee Mee Hu
Senior Vice President
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Toronto
Allan McLean
Vice President - Senior Analyst
Corporate Finance Group
Moody's Canada Inc.
(416) 214-1635

No Related Data.
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