PRESS RELEASE: DBRS Finalizes Rating of A (low) on CSS (FSCC) Partnership

18th Jun 2010 17:19

DBRS(R) As It Happens JUNE 18, 2010 12:15 PM Press Releases (http://www.dbrs.com) DBRS Finalizes Rating of A (low) on CSS (FSCC) Partnership DBRS has today finalized its provisional rating of A (low) with a Stable trend on the $190 million senior secured bond issue (Bonds) of CSS (FSCC) Partnership (ProjectCo). ProjectCo is the special-purpose entity created to design, build, finance and maintain a new 650,000 square foot research Forensics Services and Coroner's Complex centre under a 32.5-year public-private partnership (PPP) with Infrastructure Ontario (IO). The rating is predicated on the pass-down of all construction risks and responsibilities to Carillion Construction Inc., along with the reasonable level of complexity of the project and the performance security package provided to ProjectCo. The profile of the contractor retained to perform all services during the 30-year service phase, the creditworthiness of the guarantor for the service phase and the relatively low credit risk of Infrastructure Ontario, the entity responsible for the provision of substantial completion and availability-based payments to ProjectCo, also contribute strongly to the rating. Nevertheless, the credit profile is constrained by the usual uncertainties related to construction projects and the limited ability of the builder to self-perform the project. While typical of PPPs, the high leverage to be carried by ProjectCo over the life of the project and the limited resources available to ProjectCo to weather unexpected shocks, such as a service provider replacement or construction difficulties, also limits the rating. Spanning approximately 30 months, the construction phase will start in summer 2010, with a target substantial completion date of January 2013. The structure will have five storeys above grade and a single-storey basement featuring a parking garage. The work will be undertaken by Carillion Construction Inc. (the Construction Contractor) under a fixed-price date-certain contract. Carillion Construction Inc. has provided a letter of credit of 10% of the contract price and a parent guarantee of 50% of the contract price from Carillion plc. The project will also employ Subguard insurance covering subtrade defaults up to a maximum of $95 million. The resulting enhancement package is roughly equivalent to others seen for investment-grade builders in reasonably straightforward construction projects. The Technical Advisor has noted that the overall scope of services to be provided is somewhat similar to other projects in Ontario, but with more detailed specification requirements commensurate with the nature of the facility, and that the construction phasing appears logical and budget contingencies provide a reasonable cushion. The 30-year service phase will commence upon substantial completion and entails routine and lifecycle maintenance of the facility and electromechanical equipment, as well as management of energy consumption and lifecycle maintenance in order to return the facility to IO upon expiry of the Project Agreement (PA) in a state of good repair. Services such as cleaning, help desk services, grounds maintenance, waste management, pest control and security provision are also within the scope of the project. Except for insurance responsibilities, all of ProjectCo's obligations related to the service phase have been subcontracted for the term of the project to Carillion Services (FSCC) Inc. (the Service Provider), a wholly-owned subsidiary of Carillion plc. Carillion plc has extensive involvement in PPP projects and lifecycle maintenance and can draw heavily upon its experience in the United Kingdom. The contract mirrors the relevant sections of the PA, including the performance standards and payment mechanism, and holds the Service Provider accountable for service failure penalties, unless caused by ProjectCo. The output requirements are clearly defined and reasonable and the performance penalties are adequately sized for the severity of the failures. With all service responsibilities transferred to a highly skilled subcontractor and revenues originating from a creditworthy public sector counterparty, ProjectCo should benefit from a relatively stable operating profile. Typical of PPPs, however, leverage will be high at the onset of the service phase despite the repayment of the Senior Credit Facility upon receipt of the Substantial Completion Payment. Debt-to-cash flow available for debt servicing will stand at just under ten times in the early years of the service period, while the debt service coverage ratio is expected to average 1.25 times over the term of the project. Since most of ProjectCo's revenues will be fixed for the life of the project, this leaves limited ability to sustain unexpected shocks. The large Substantial Completion Payment in relation to the amount of debt in the permanent capital structure further reduces the ability of the financing structure to withstand material budget changes during the service phase to the low end of the range for the "A" rating category. Nevertheless, DBRS takes comfort from Carillion's track record on similar and related projects and its involvement throughout the life of the project, which mitigates this risk to a degree. Notes: All figures are in Canadian dollars unless otherwise noted. The applicable methodology is Rating Canadian Public-Private Partnerships, which can be found on our website under Methodologies. This is a Public Finance rating. Click here for the full document. (http://www.dbrs.com/intnlweb/document?docId=233519) Issuer DebtRated RatingAction Rating Trend Notes LatestEvent CSS (FSCC) Partnership Senior Secured Debt Provisional Rating - Finalized A (low) Stb Jun 18, 2010 Grant Headrick Vice President - Public Finance +1 416 597 7393 [email protected] Eric Beauchemin, CFA Managing Director - Public Finance +1 416 597 7552 [email protected] ALL DBRS RATINGS ARE SUBJECT TO DISCLAIMERS AND CERTAIN LIMITATIONS. PLEASE READ THESE DISCLAIMERS AND LIMITATIONS (http://www.dbrs.com/about/disclaimer) . ADDITIONAL INFORMATION REGARDING DBRS RATINGS, INCLUDING DEFINITIONS, POLICIES AND METHODOLOGIES, ARE AVAILABLE ON WWW.DBRS.COM (http://www.dbrs.com) . (END) Dow Jones Newswires June 18, 2010 12:19 ET (16:19 GMT)