Approximately CAD474.9 million of debt securities affected
Toronto, January 24, 2023 -- Moody's Investors Service ("Moody's") today assigned a first-time A3 rating to two amortizing senior secured bonds totaling approximately CAD474.9 million to be issued by EllisDon Infrastructure SNH General Partnership (Project Co). The rating outlook is stable.
Assignments:
..Issuer: EllisDon Infrastructure SNH General Partnership
....Senior Secured Regular Bond/Debenture, Assigned A3
Outlook Actions:
..Issuer: EllisDon Infrastructure SNH General Partnership
....Outlook, Assigned Stable
Project Co will use the bond proceeds to finance a portion of its obligations under a long-term project agreement (Project Agreement) with Niagara Health System (NHS or the Contracting Authority) to design, build, finance, operate, maintain and rehabilitate the South Niagara Hospital Project (the Project). During the construction period, Project Co will receive milestone payments as well as a substantial completion payment from NHS. Once the Project reaches substantial completion, Project Co will receive availability payments over a thirty-year period from NHS designed to cover maintenance, rehabilitation, debt service and equity returns. The availability payments will be subject to deductions only for unavailability, performance, energy and system failures.
RATINGS RATIONALE
The A3 rating reflects the well understood Project Agreement with a credit worthy counterparty in Niagara Health System, a public hospital incorporated in Ontario. We view the credit worthiness of the Contracting Authority to be on par with the Province of Ontario (Aa3, stable).
The Project is a standard large scale hospital to be built on a greenfield site with relatively limited construction constraints. EllisDon Inc. (20%) and Plenary Americas GP Inc. (80%), through their affiliates, are the equity sponsors. Both EllisDon and Plenary are highly experienced in public private partnerships (P3) and health care facilities. EllisDon Corporation, a wholly owned subsidiary of EllisDon Inc., is the Construction Contractor and has strong expertise as well as solid knowledge of the Ontario market. Further, EllisDon appears to have implemented a solid strategy with respect to its major subcontractors, with early selection of key subcontractors and the implementation of a subcontractor default insurance program. The A3 rating also factors in an adequate liquidity profile that can withstand a twelve-month construction delay on top of a construction schedule that seems to have reasonable room.
Once completed, Project Co's maintenance and rehabilitation obligations under the Project Agreement will be subcontracted to the Service Provider, EllisDon Facilities Services Inc. (guaranteed by EllisDon Inc). The performance regime is typical of an Ontario hospital project that includes simple hard facilities management (FM) obligations and does not entail material soft FM requirements. We expect Project Co to perform with low levels of deductions and failure points. Further supporting the credit profile of Project Co are adequate credit metrics with a minimum and average debt service coverage ratio (DSCR) of 1.18x and 1.23x respectively and a minimum cash breakeven ratio of 21%. The debt structure is adequate with a permitted distribution test of 1.13x DSCR and event of default DSCR of 1.05x.
These credit attributes are tempered by the following considerations. Specifically, although it has good liquidity and relatively low level of debt, EllisDon Inc. as guarantor of the parties carrying out the construction, facilities management and rehabilitation on behalf of Project Co is considered to have a speculative grade credit profile due to its relatively small size and lack of segment and geographical diversity compared to its international peers. A high degree of comfort is attributed to the fact that there have been many health care P3 projects and thus the required technical standards are well known and understood, cost budgeting should be relatively easy given the recent precedents and EllisDon is one of the best placed companies to carry out the works on time and budget with respect to a hospital project. As such, while not likely, should there be a need to replace EllisDon during the term of the Project Agreement, there is no concept of acceptable remaining party and thus it would need to be replaced, potentially at a higher cost to Project Co. The Project's large scale and uncertain market conditions can also put pressure on Project Co in a contractor replacement scenario. That said, the construction company's obligation to pay delay liquidated damages is backed by the liquid portion of a Performance Plus Bond. In addition, there is substantial security in the form of a 50% performance bond and a 50% Labour & Materials Payment Bond to support the Construction Contractor's obligations. We expect that given these considerations along with the standard nature of the asset and the number of construction companies in the Ontario market that could complete the Project, the risk of Project Co not being able to afford the replacement of the contractor is limited.
RATING OUTLOOK
The rating outlook is stable reflecting our expectation that the Project will be completed largely on time or with minimal delays and when completed, will operate with minimal deductions to its availability payments.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
WHAT COULD CHANGE THE RATINGS 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 operations, in order to be upgraded, Project Co should demonstrate a consistent ability to comfortably meet its planned DSCRs.
WHAT COULD CHANGE THE RATINGS DOWN
• The construction of the Project is materially delayed beyond the target date for substantial completion being February 2028;
• The credit worthiness of the Construction Guarantor and Service Guarantor weakens materially;
• The providers of the letters of credit (or equivalent instrument) are rated below A3 and not replaced;
• The credit worthiness of the Contracting Authority deteriorates materially; or
• Once in operations, the actual DSCR is below 1.15x on a sustained basis.
The methodologies used in these ratings were Construction Risk in Privately Financed Public Infrastructure (PFI/PPP/P3) Projects published in July 2019 and available at https://ratings.moodys.com/api/rmc-documents/63363, and Operational Privately Financed Public Infrastructure (PFI/PPP/P3) Projects Methodology published in June 2021 and available at https://ratings.moodys.com/api/rmc-documents/72487. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of these methodologies.
EllisDon Infrastructure SNH General Partnership is a single purpose entity who will enter into a project agreement with Niagara Health System to design, build, finance, operate, and maintain the South Niagara Hospital Project.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found on https://ratings.moodys.com/rating-definitions.
For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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 issuer/deal page for the respective issuer on https://ratings.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.
These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website https://ratings.moodys.com.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://ratings.moodys.com/documents/PBC_1288235.
The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on https://ratings.moodys.com.
The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on https://ratings.moodys.com.
Please see https://ratings.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.
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Rebecca Adair
Vice President - Senior Analyst
Project & Infra 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 & Infra 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
