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Rating Action:

Moody's assigns A3 rating to Fengate PCL Progress Partners MBR LP senior secured bonds; outlook stable

16 Jul 2019

Approximately CAD144.5 million of debt securities affected

Toronto, July 16, 2019 -- Moody's Investors Service ("Moody's") today assigned a first-time A3 rating to two amortizing senior secured bonds totaling approximately CAD144.5 million to be issued by Fengate PCL Progress Partners MBR LP (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 Ontario (the Authority, Aa3 stable) to design, build, finance, maintain and rehabilitate the reconstruction of the MacDonald Block Complex in Toronto, Ontario (the Project). During the construction period, Project Co will receive construction period payments from the Authority and a Substantial Completion Payment upon completion. Once the Project reaches Substantial Completion, Project Co will receive availability payments over a thirty-year period from the Authority designed to cover maintenance, rehabilitation, debt service and equity returns. The availability payments will be subject to deductions for unavailability and service or quality failures.

RATINGS RATIONALE

The A3 rating reflects the well-understood Project Agreement with a credit worthy counterparty in the Authority, a Aa3 rated government. The Project Agreement incorporates a typical Infrastructure Ontario risk allocation that has been used on many other social infrastructure projects. We view the Project to be at the low end of complexity for a social infrastructure project because of its brownfield nature, with the absence of any material site preparation or utility relocations, the repetitiveness of its reconstruction on a floor-by-floor basis and the relative simplicity of its ultimate use as a general-purpose government office building. It is being undertaken collectively by Fengate Capital Management Ltd. (80%) and PCL Investments Canada Inc. (20%) as the Equity Sponsors. Project Co has passed down the obligations under the Project Agreement to build the Project on a back-to-back basis to PCL Constructors Canada Inc. (an affiliate of PCL Construction Group Inc.), the Construction Contractor. The rating recognizes the experience of the Construction Contractor as a company with strong experience with public-private partnerships (P3s), the Ontario market and with projects of this type, scale and complexity. Further, the A3 rating factors in an adequate liquidity profile with a commitment by the Construction Contractor to pay delay liquidated damages starting at the Scheduled Substantial Completion Date for up to twelve months of construction delay, which is on top of a schedule that has been appropriately built up. The Construction Contractor's obligation to pay delay liquidated damages is backed by a letter of credit from a bank with a minimum A3 rating, or equivalent.

The obligations of the Construction Contractor will be guaranteed by the Construction Contractor's parent, PCL Construction Group Inc., up to a liability cap of 40% of the construction contract price. There is no third-party security available to Project Co to afford a replacement contractor over and above the letter of credit posted by the Construction Contractor supporting the payment of delay liquidated damages. However, PCL has a history of successfully completing several P3 social infrastructure projects and we expect it to be unlikely that a replacement contractor will be needed during the construction period.

Once completed, Project Co's maintenance and lifecycle obligations under the Project Agreement will be subcontracted to Johnson Controls Canada L.P. (an affiliate of Johnson Controls International plc (Baa2 stable)), the Service Provider. The performance regime is typical of an Infrastructure Ontario P3 project that includes simple hard facility management (FM) obligations and does not entail material soft FM requirements. We expect the Service Provider to perform with minimal deductions and failure points. Further supporting the credit profile of Project Co are strong credit metrics, in the context of a simple project with a narrow range of services to be provided, with a minimum and average debt service coverage ratio (DSCR) of 1.41x and 1.49x respectively and a minimum annual DSCR break-even ratio of 20.5% (average of 25.8%). We observe that the debt structure is somewhat weak with the event of default DSCR being set at 1.00x with equity cures, however this structure is standard for a Canadian P3 transaction and incorporates a permitted equity distribution test of 1.20x DSCR.

RATING OUTLOOK

The stable outlook reflects 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.

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 life cycle costs. Once in operation, in order to be upgraded, Project Co should demonstrate a consistent ability to comfortably meet its planned DSCRs and have a track record of limited failure points and deductions.

WHAT COULD CHANGE THE RATING DOWN

The rating could be downgraded if:

• Construction is delayed substantially beyond the target Substantial Completion Date expected on March 31, 2024;

• The credit worthiness of the Construction Contractor weakens materially;

• The credit worthiness of the Authority deteriorates materially;

• The providers of the letter of credit are rated below A3 and not replaced; or

• While in the operating phase, the Service Provider performs poorly and incurs significant deductions and results in a contractor replacement scenario

The methodologies used in these ratings were Construction Risk in Privately-Financed Public Infrastructure (PFI/PPP/P3) Projects published in June 2016, 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.

Fengate PCL Progress Partners MBR LP is a single purpose partnership that will enter into the Project Agreement to design, build, finance, and maintain the MacDonald Block Reconstruction Project in Toronto, Ontario. It is owned by Fengate Capital Management 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.

Louis Ko
Vice President - Senior Analyst
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

Michael J. Mulvaney
MD - Project Finance
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.
© 2019 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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