DBRS issues rare warning
For just the second time in the two decades that DBRS Ltd. has been rating public- private-partnerships — the so-called P3s — the agency has placed a project company’s ratings under review during the operational phase.
Presumably, if the problem isn’t fixed within a reasonable period of time then the bonds that were issued by Hospital Infrastructure Partners — the special- purpose entity contracted to design, build, finance and maintain a new 1.8 million square foot hospital in Oakville, Ont., under a 34- year public- private partnership agreement — will be downgraded.
DBRS — as well as Standard & Poor’s — swung into action when the project company advised that an event of default had occurred under one of the many agreements that are a standard feature of P3s.
In short, work done by the service provider — a joint venture between Carillion Canada and -Ellis-Don — hadn’t performed as expected.
The Oakville- based hospital, which came with a construction cost of $ 975.8 million and an overall cost of $1.25 billion, reached substantial completion last July and was given the green light to open last December. More than $ 540 million of 34- year bonds at a coupon of 5.439 per cent were issued in mid-2011. The bonds, initially priced at $ 99.19 per $ 100 face value, hit a sixmonth low Monday when they closed at $113.874, down $ 6.086 on the day. At that price the yield translates to 4.265 per cent,
Grant Headrick, a managing director of infrastructure finance at DBRS, said that under review status arose because of problems in the hospital’s air handling units. That problem, which started last February, led to pipe ruptures and flooding. Another problem related to the door locking mechanism.
“All of these haven given rise to unavailability deductions for these phases,” noted Headrick. In other words, the payments from the Oakville Hospital (which in turn come from the Ontario government) are not being made to the service providers. Headrick wouldn’t disclose the amount of money being withheld, other than to say that the service providers “are feeling some substantial deductions,” in large part because the contract runs for 30 years.
Calls to Ellis-Don seeking a comment weren’t returned.
It seems that the problems have been around for a period of time: They started in February and the hospital issued a monitoring notice in mid- April with the expectation that they would be fixed within 30 days.
Until the problems have been solved, payments will continue to be withheld and there is no opportunity for the service providers to receive makeup payments. It’s possible the service provider may try to collect from parties who installed the equipment.
From DBRS’s perspective, Strait Crossing Development Inc. — the private sector developer that designed, built, financed, and operates the Confederation Bridge — is the only other P3 project that it put on credit watch during the operational phase. The rating on the entity, which has the contract to operate the bridge until 2032, was altered because of lower-thanexpected traffic flows.
Headrick said DBRS has downgraded the ratings of at least a couple of P3s during the construction phase. The two most noteworthy examples were the University of Montreal complex, which was downgraded, in part, because of a downgrade at SNC- Lavalin and because of some ongoing construction issues; and the first extension of Ontario’s 407 Highway. The issuer in the latter was the 407 East Development Group (whose major backers are SNC-Lavalin and Cintra.)