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Rating Action:

Moody's assigns A3 rating to CBHP Limited Partnership senior secured bonds; outlook stable

26 Jul 2019

Approximately CAD290.7 million of debt securities affected

Toronto, July 26, 2019 -- Moody's Investors Service ("Moody's") today assigned a first-time A3 rating to two amortizing senior secured bonds totaling approximately CAD290.7 million to be issued by CBHP Limited Partnership (Project Co or the Issuer). The outlook is stable.

Project Co will use the bond proceeds to finance a portion of its obligations under a long-term project agreement (Project Agreement) with the Province of Newfoundland and Labrador (A1 stable) and the Western Regional Health Authority (WRHA) whose obligations are on a joint and several basis (collectively, the Authority) to design, build, finance, maintain and rehabilitate the new Corner Brook Acute Care Hospital Project in Corner Brook, Western Newfoundland (the Project). Once the Project reaches substantial completion, Project Co will receive from the Authority a substantial completion payment (that will be used to fully repay a construction period bank facility) and then availability payments over a 30 year period designed to cover maintenance and rehabilitation costs, debt service and equity returns. The availability payments will be subject to deductions only for unavailability events, service failures or system failures.

RATINGS RATIONALE

The A3 rating reflects the well-understood Project Agreement that incorporates a standard risk allocation for Canadian public-private partnerships (P3s) and is based on the Partnerships BC template used by the Province of British Columbia. We view the Project construction to be of standard complexity for a hospital project given its medium-size and the fact that the construction site has been cleared and does not require material utilities relocation. While the Project is being built near another P3 project, the long-term care facility, it should not result in undue constraints or difficulties. However, the most important aspect of the Project during construction relates to the fact that Corner Brook has limited labour and materials availability and thus the design-build joint venture (and its sub-contractors) engaged by the Issuer will need to hire from other parts of Newfoundland, and potentially from mainland Canada and may need to bring some of the materials and equipment by ferry from Nova Scotia. From a climate point of view as well, special measures will need to be taken to deal with high levels of snow accumulation. The design-build joint venture appears to be well prepared to address these two possible risk areas.

The Project is being undertaken by a very experienced consortium that includes Plenary Group (Canada) Ltd. (80%) and PCL Investments Canada Ltd. (20%) as the equity sponsors. In turn, Project Co has passed down the obligations under the Project Agreement to build the Project on a back-to-back basis to the design-build joint venture (DBJV), which is composed of PCL Constructors Canada Inc. (an affiliate of PCL Construction Group Inc.) (70%) and Marco Services Limited (30%). The rating recognizes the highly qualified consortium undertaking the Project, which includes in addition to the equity sponsors and the DBJV, Johnson Controls Canada LP as the Service Provider, with all parties benefitting from a wealth of experience in Canadian P3s and hospital projects. Although Marco is a smaller company in the DBJV, it is a local company with good experience in Newfoundland and it is the constructor on the Corner Brook long-term care facility thus bringing good knowledge of local supply chain conditions, site conditions and an existing relationship with the Authority. Both the construction budget and schedule appear to have been built in a solid manner so that the DBJV should have some ability to absorb some cost overruns under its fixed price contracts and/or accelerate the works if a delay appeared. The DBJV has posted a material liability cap in an amount equal to 100% of its construction price but we note that PCL Constructors Canada Inc.'s obligations are not guaranteed by its ultimate parent. This consideration is offset by the fact the DBJV has posted a material amount of security in the form of a 50% performance bond that should help to minimize the impact on lenders from a possible need to replace the DBJV at a higher cost. Should a construction delay occur though we note that the liquidity to deal with such a delay is somewhat weaker than typically seen on this type of project given that the liquid portion of the P3 bond does not cover the entire 12 months of delay liquidated damages owed by the DBJV in case of delay. As well there are some small liquidity gaps that again we would normally not see in this type of project although we believe that all parties will be incentivized to avoid a debt default in case of delays that are not compensation events.

Once completed, Project Co's obligations under the Project Agreement, which are limited to essentially hard facilities management services and life cycle obligations, will be subcontracted on a back-to-back basis to the Service Provider (an affiliate of Johnson Controls International plc (Baa2 stable)). The performance regime is clearly laid out in the Project Agreement and is standard for healthcare projects in British Columbia. It is expected that a Service Provider of the quality of Johnson Controls should be able to discharge its obligations with minimal deductions to the service payment. Further supporting the credit profile of Project Co are adequate credit metrics for an availability payment P3 project without undue complexity and where all the maintenance and lifecycle obligations are fully subcontracted to a third party of good credit quality. The debt is sculpted to a minimum and average debt service coverage ratio (DSCR) of 1.18x; the minimum DSCR break-even ratio of 22.7% is adequate, while the average DSCR break-even ratio of just under 40.0% is solid and bodes well for Project Co's ability to replace the Service Provider at a higher cost if need be. We observe that the debt structure is weak with the event of default DSCR being set at 1.00x with some equity cures (although fairly restricted), however this structure is standard for a Canadian P3 transaction and there is a solid permitted equity distribution test of 1.13x DSCR.

RATING OUTLOOK

The stable outlook reflects our expectation that the Project will be completed largely on time or with minimal delays and, once completed, will operate with minimal deductions to its availability payments.

WHAT COULD CHANGE THE RATING UP

• The rating has limited ability to be upgraded until after the end of the construction period and until there is a material track record of successful performance with a good control of maintenance and rehabilitation costs. Once in operation, in order to be upgraded, Project Co should demonstrate a consistent ability to comfortably meet its planned DSCR. Also, with the current rating of Newfoundland and Labrador at A1, there are limitations around the ability of the issuer's rating to be upgraded.

WHAT COULD CHANGE THE RATING DOWN

• Construction is delayed substantially beyond the target date for substantial completion expected on November 7, 2023;

• The credit worthiness of the DBJV or the Service Provider weakens materially;

• The providers of the required letters of credit are downgraded below A3 and not replaced in a timely manner;

• The credit worthiness of the Authority deteriorates (1 notch or more); or

• While in the operating phase, the actual DSCR is consistently at or below 1.15x.

The methodologies used in these ratings were Construction Risk in Privately Financed Public Infrastructure (PFI/PPP/P3) Projects published in July 2019, and Operational Privately Financed Public Infrastructure (PFI/PPP/P3) Projects published in October 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.

CBHP Limited Partnership is a single purpose partnership that will enter into the Project Agreement to design, build, finance, maintain and rehabilitate the new Corner Brook Acute Care Hospital Project in Corner Brook, Western Newfoundland. It is owned by Plenary Group (Canada) Ltd. (80%) and PCL Investments Canada Inc. (20%).

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

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 Canada Inc.
70 York Street
Suite 1400
Toronto, ON M5J 1S9
Canada
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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