DBRS Morningstar Confirms Rainbow Hospital Partnership at BBB (high) with Stable Trends

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating and the rating on the Series 2 Senior Bonds (the Bonds) of Rainbow Hospital Partnership (ProjectCo) at BBB (high). Both trends are Stable. ProjectCo is the special-purpose vehicle contracted by the Province of New Brunswick (the Province; rated A (high) with a Stable trend by DBRS Morningstar) to design, build, finance, and maintain a 360,000-square-foot mental health hospital (the Project) in Campbellton, New Brunswick, under a 33-year Project Agreement (PA).

Substantial Completion was achieved on December 24, 2014 and final completion on June 23, 2016. The Project is in the eighth year of a 30-year service phase ending on October 15, 2044. During the operations period, all risks and responsibilities with respect to maintenance and rehabilitation tasks under the PA are passed down to SNC-Lavalin O&M Inc. (the Service Provider), with parent guarantee from SNC-Lavalin Group Inc. (Service Provider Guarantor, rated BB (high) with a Stable Trend by DBRS Morningstar). Currently, DBRS Morningstar does not give credit to the risk transfer to the Service Provider because the performance guarantee is from a non-investment-grade entity.

The Project's operating performance has steadily improved in the last few years. While there were approximately 9,400 failure points in 2020, there were nil failure points in 2021. Deductions for 2021 were also low at less than $1,500. There has been no material impact of the Coronavirus Disease (COVID-19) pandemic on ProjectCo's operations. The energy consumption targets have yet to be established, and hence there has been no energy gainshare/painshare adjustments made on the payments to ProjectCo.

ProjectCo indicated that the dispute with the Province with respect to the door pivot issue remains outstanding, although there were no deductions applied to ProjectCo's payments in 2021. The dispute with respect to damage to the facility caused by patients is also outstanding, with the Service Provider continuing to make repairs without compensation by the Province under the Excusing Causes provision. There is an open dialogue between the Design Build Joint Venture, Service Provider, and the Province, and ProjectCo is of the opinion that, in general, the working relationship is good.

As per the latest compliance certificate, the debt service coverage ratio (DSCR) for the 12-month period ended December 31, 2021, was 1.21 times (x) which was slightly lower than previously projected, because of provision for doubtful account related to the deductions for the door pivots. For the next 12 months (ending December 31, 2022), ProjectCo expects DSCR to be 1.25x. The minimum DSCR is 1.23x over the life of the project, with lifecycle and operating and maintenance resiliencies of 39% and 51%, respectively.

DBRS Morningstar believes a positive rating action is unlikely in the near term. A negative rating action may result if the Project’s operating performance deteriorates materially, leading to an accumulation of failure points that could potentially trigger various contractual thresholds.

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; https://www.dbrsmorningstar.com/research/383244), 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 03, 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 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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