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
