DBRS Morningstar Downgrades TransEd Partners General Partnership

DBRS Limited (DBRS Morningstar) downgraded the Issuer Rating and the rating on the Series A Bonds of TransEd Partners General Partnership (ProjectCo) to BB (high), while maintaining its status of Under Review with Negative Implications. At the time of DBRS Morningstar’s last update on December 22, 2021, the Service Commencement date was delayed and expected to be achieved in the summer of 2022, beyond the Project Agreement (PA) Long Stop Date (the Long Stop Date Issue) of February 27, 2022. ProjectCo and the City of Edmonton (the City) were expected to decide on the extension of the PA Long Stop Date in January or February 2022. The Finance Party Long Stop Date had subsequently been extended to a date not earlier than February 27, 2022. While progress has been made in the discussions between ProjectCo and the City, no agreement has been reached so far. The long stop dates have been breached, triggering an event of default under the PA and the financing agreements. The downgrade reflects the increased risk to the project on account of the construction delays, in the absence of a satisfactory agreement between the parties.

DBRS Morningstar notes that there has been no payment default by ProjectCo and that the construction is 98.7% complete (as of December 31, 2021). DBRS Morningstar’s expectation remains that the parties will work together and eventually arrive at a solution and does not expect a termination of the PA. All these factors support the ratings at the current level, despite an event of default under the project and financing documents having been triggered. DBRS Morningstar also notes that under the Direct Lender Agreement, the bondholders have the right to step in and cure a default before the PA can be terminated.

As indicated in the DBRS Morningstar commentary of December 22, 2021, the delay of the anticipated Service Commencement date beyond the PA Long Stop Date was primarily attributable to the Coronavirus Disease (COVID-19) pandemic, vandalism, slower-than-anticipated energization, and commissioning delays. All the light rail vehicles required have been delivered to the project site. The Lenders Technical Advisor (LTA) in its report dated January 31, 2022, indicated there were a few weeks of further delay from previous expectations, though some lost productivity could be recovered. The LTA noted that although the current schedule was robust, the ongoing external impacts of the pandemic would cause challenges in the months ahead. ProjectCo indicated that the construction progress currently is substantially in line with the anticipated Service Commencement Date.

DBRS Morningstar does not expect a cash shortfall for meeting principal or interest payments on the Series A Bonds. To cover short-term interest, ProjectCo expects to use available sources of funds, which may include liquidated damages (LDs) to be paid by the Design Builder Joint Venture. DBJV. The LD cap is estimated to be reached only on October 21, 2022, beyond the currently forecast Service Commencement Date. The $200.7 million Senior Secured Term Loan Facility currently matures on June 15, 2022, and DBRS Morningstar expects ProjectCo will address this over the coming months.

DBRS Morningstar continues to closely monitor the credit and the progress of discussions with the City. The ratings may be negatively affected from the current levels if the discussions with the City on the Long Stop Date Issue do not conclude satisfactorily in a reasonable timeframe. The ratings may be under greater negative pressure, with the passage of time or being closer to a payment default. The ratings may also come under further pressure on the exercise of rights by the parties which negatively impacts ProjectCo or the rated debt. The ratings may be removed from Under Review if the parties enter into a satisfactory agreement without incurring any further delays.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

Notes:
All figures are in Canadian Dollars unless otherwise noted.

The principal methodology is Rating Public-Private Partnerships (August 19, 2021), which can be found on dbrsmorningstar.com under Methodologies & Criteria. Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021; https://www.dbrsmorningstar.com/research/373262).

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link under Related Documents or by contacting us at info@dbrsmorningstar.com.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had have access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.

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