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Rating Action:

Moody's assigns A3 to Plenary Health Vaughan LP's senior secured bonds; outlook stable

12 Oct 2016

New York, October 12, 2016 -- Moody's Investors Service has assigned a rating of A3 to C$[278] million long-term senior secured bonds to be issued by Plenary Health Vaughan LP ("Project Co"). Project Co will also enter into a C$[150] million unrated senior secured short-term, non-revolving, delay draw bank loan. The rating outlook is stable.

Issuer Background

Project Co is a newly formed special and single purpose vehicle that will enter into a Project Agreement with the Mackenzie Health Hospital ("MH" or "the Authority") to design, build, finance and maintain the new Mackenzie Vaughan Hospital Project (the "Project") for a term equal to the construction period plus 30 years. The Project Agreement is granted by Her Majesty the Queen in Right of Ontario ("HMQ"), as represented by the Ministry of Health and Long-term Care. The two equity sponsors are Plenary Group (Canada) Ltd. with 80%, and PCL Investments Canada Inc. with the remaining 20%. The construction contractor is PCL Constructors Canada Inc. ("PCL") and the service provider is Johnson Controls Canada LP.

RATINGS RATIONALE

The A3 rating reflects the relevant strength and significant experience of the consortium in delivering similar or larger size healthcare related P3 projects in the region, as well as the greenfield nature of the project with low geotechnical risks and moderate construction complexity and the high credit quality of the offtaker. The monthly government contributions during construction and availability payments will come directly from MH, which in turn is primarily funded by the Province of Ontario (Aa2, stable). We view MH's credit quality as being closely tied to that of the Province given the majority (over 80%) of MH' revenues come from the Province and there is significant Provincial oversight of MH's operations and financial performance. The key consortium members have a strong working history and track record of delivering projects on time and on budget. The 11-story building has an approximate 45-month construction schedule, with large mechanical and electrical components' requirements that are significant, and although the construction complexity is deemed to be moderate, it is subject to sequential completion which could pose some constraints. Partially mitigating this risk is the limited nature of medical equipment procurement by Project Co, which excludes medical equipment procured by the Managed Equipment Services Provider contracted by MH, some of which will be delivered and installed post substantial completion.

The risk of performance delivery is primarily mitigated by the recent delivery of a larger and more complex hospital project by this same consortium which has also carried over some of the same key personnel. Further, the location of the site with multiple access points and its greenfield nature provide added benefits with respect to schedule constraints in the event of a need to accelerate construction. The monthly payments during construction will commence once at least 50% of the total capital costs (debt and equity) have been disbursed. Although disbursed last, the bank loan will be subject to a true-up should an event of default occur during construction. The performance security during construction includes a 5% letter of credit ("L/C") sized to cover twelve months of delays as well as a 50% liability cap backed by a parent guarantee from PCL Construction Group, Inc.

The project's responsibilities with respect to Facility Management (FM) and lifecycle are fully subcontracted on a back-to-back basis to Johnson Controls Canada, LP, a strong credit quality service operator with significant experience in P3 hospital operations in the region. Even so, the FM responsibilities are not considered complex, with typical grounds maintenance for soft FM (excluding all patient related services) and mechanical and electrical (M&E) operations and utilities management at the site. The performance security during the operating phase is adequate, with a parent company guarantee provided by Johnson Controls, Inc. (JCI), (Baa1, stable), plus a L/C sized at 50% of the annual average operations and maintenance costs and lifecycle costs with a 200% aggregate liability cap over the life of the Project. There will also be a 200% liability cap for termination. The L/C increases to 75% in the event JCI suffers a credit rating downgrade below Baa2 or becomes unrated.

The availability payment mechanism is considered standard, although it also includes a system failures point deduction which is new. The technical advisor believes that the point deduction system, which we understand was derived from lessons learned at other projects, should provide additional clarity with respect to deductions. Credit metrics are considered tight, but adequate, with a low average annual DSCR of 1.17x and weak breakeven ratios towards the last decade of the project's life in the high-teens, dipping to a minimum of 18.3%. There is also a 1.00x financial covenant that if not met would result in an event of default, subject to limited equity cures, which we view as weak, and a 1.13x equity lock-up test. These structural weaknesses are partially mitigated by a strong service provider with experience in similar or larger projects with additional FM complexities. The project also benefits from standard security package of pledged agreements and shares including covenants to limit future debt, restricted payment test, lender step-in rights, and compensation on termination.

There is a standard 6-month debt service reserve funded with cash at substantial completion that could be replaced with an L/C recourse to the project. Reimbursement obligations should the L/C be drawn would result in project level subordinated indebtedness. Moody's views the flexibility for the sponsor to replace a cash funded debt service reserve with a project level L/C as a credit negative and a structural weakness for bondholders. That said, the assigned rating acknowledges the view that the related debt incurred should the L/C be drawn would be repaid subordinate to senior lenders pursuant to a cash flow waterfall and subject to Project Co meeting the 1.13 restricted payments test. Moreover, we understand that pursuant to the terms of the subordination agreement, should an event of default occur, the subordinated debt must standstill until the senior debt is repaid. We further note that Project Co can incur similarly structured sponsor subordinated debt to continue paying debt service during certain relief events such as strikes when the receipt of payment from MH is at substantial completion. This lack of readily available liquidity is viewed negatively, but is partially mitigated, in our view, by the unlikelihood of a prolonged strike, the modest level of sponsor capital most likely needed to bridge this funding gap, and our belief that there would be a strong economic incentive for the sponsors to provide the required liquidity if needed.

Outlook

The stable outlook reflects our view that construction will progress on time and on budget.

What Could Change the Rating -- Up

The rating is unlikely to face upward rating pressure until the Project is constructed and accepted by the government and there is an established operating history with minimal deductions or failure points incurred.

What Could Change the Rating -- Down

If there are material unmitigated delays that the technical advisor confirms will notably impact the Project's completion, or if construction contractor materially weakens from a credit worthiness point of view or in the extreme, becomes insolvent or bankrupt, and while in the operating phase, the actual debt service coverage ratio is consistently below 1.17x

The methodologies used in this rating were Construction Risk in Privately-Financed Public Instrastructure (PFI/PPP/P3) Projects published in June 2016 and Operational Privately Financed Public Infrastructure (PFI/PPP/P3) Projects published in March 2015. Please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.

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.

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.

Jennifer Chang
Asst Vice President - Analyst
Project Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

A.J. Sabatelle
Associate Managing Director
Project Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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