Okanagan Correctional Centre Bond Rating
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Rating Report
Report Date:
March 21, 2014
1 Public Finance: Infrastructure
Analysts
Achraf Joumaa
+1 416 597 7440
ajoumaa@dbrs.com
Grant Headrick
+1 416 597 7393
gheadrick@dbrs.com
Eric Beauchemin, CFA
+1 416 597 7552
ebeauchemin@dbrs.com
The Company
Plenary Justice
Okanagan LP is the
special-purpose vehicle
created by Plenary
Canadian Holdings Inc.
and contracted by the
Government of British
Columbia to design,
build, finance and
maintain the Okanagan
Correctional Centre
(OCC). The 378-inmate
29,500 m2 high security
facility will be located
near Penticton, B.C.
Plenary Justice Okanagan LP
Rating
Debt Rating Rating Action Trend
Series A Senior Notes A (low) Provisional Rating – Finalized Stable
Rating Rationale
DBRS has finalized its provisional rating of A (low) with a Stable trend on the proposed $114.5 million,
Series A Senior Notes of Plenary Justice Okanagan LP (ProjectCo), the special-purpose entity created to
design, build, finance and maintain the Okanagan Correctional Centre (OCC). The project is governed by a
32.6-year Project Agreement (PA) signed between ProjectCo and the Province of British Columbia (the
Province; rated AA (high), Stable trend). The sizable construction enhancement package, combined with the
credit profile of the Design-Build Contractor (the DB Contractor) and the relatively low complexity of work,
results in a construction phase considered strong for the rating category. The project includes extensive
requirements related to security equipment and provisions for higher levels of wear and tear, but the low
payment risk related to ProjectCo revenues, the straightforward nature of overall service obligations and the
sound operating resilience are supportive of the rating during the service phase.
The project involves the construction of a three-storey high-security correctional facility located near
Penticton, B.C. The construction phase extends for 31 months starting in March 2014 followed by a 30-year
service phase commencing at the Service Commencement Date targeted for September 30, 2016. ProjectCo
has passed down on a back-to-back basis all of its construction responsibilities to PCL Constructors
Westcoast Inc. (the DB Contractor), which has agreed to complete the work on a fixed-price and date-certain
basis. A subsidiary of Canada’s largest general contractor, the DB Contractor plans to subcontract about 85%
of the development and will secure its performance with a 50% parent guarantee, a 50% performance bond
and a 5% letter of credit (LC). DBRS considers the construction as being of low-to-moderate complexity
while noting the more comprehensive requirements related to security systems customary for a facility of this
nature. The Lenders’ Technical Advisor (LTA) has not identified any major issues that would potentially
pose undue risk.
Upon completion of construction, Honeywell Limited (Canada) (the Service Provider) will provide facility
management as well as lifecycle maintenance and utilities management services over the 30-year service
phase of the project. The Service Provider, a subsidiary of one of the largest facilities management providers
globally, will perform the majority of the facilities maintenance and lifecycle work, while certain ancillary
facility maintenance functions like waste management and ground maintenance will be subcontracted to other
specialized parties. ProjectCo only retains responsibility for general management, performance monitoring
and the maintenance of certain insurances. Overall, the service specifications are viewed as standard for a
correctional centre, with payment deductions generally expected to be modest over the life of the project.
Typical of public-private partnerships (PPP), leverage will be relatively high with a gearing ratio of 90.5:9.5
at financial close. This is also reflected in the debt-to-cash flow available for debt servicing (CFADS) ratio of
13.1 times projected in the first year of operation and the debt service coverage ratio (DSCR) of 1.21 times
foreseen over the project’s term. Nonetheless, the results of the breakeven analysis for facility management
and lifecycle costs are viewed as adequate and are supported by a Service Provider of high quality.
Rating Considerations
Strengths Challenges
(1) Strong design-build and service contractors
(2) Minimal public sector counterparty credit risk
(3) Construction enhancement package
(4) Tight lifecycle inspection and reserving mechanism
(5) Bondholders’ step-in rights
(1) Customary construction risks
(2) Complex contractual structure
(3) Highly leveraged structure
(4) Contractor replacement risk
2 Public Finance: Infrastructure
Plenary Justice
Okanagan LP
Report Date:
March 21, 2014
Rating Considerations Details
Strengths
(1) The DB Contractor retained to design and build the facility is a subsidiary of PCL Construction Group Inc.
(PCL), Canada’s largest general contractor. PCL has a sound financial profile, a very strong reputation,
considerable expertise with social accommodation projects, and is very familiar with the delivery model used
to implement PPP projects in Canada. Plenary and PCL have completed together five PPP projects in Canada
that are currently in operation. In addition, all core activities pertaining to the service phase have been passed
down to Honeywell Limited (Canada), which has substantial expertise in PPP and is the subsidiary of one of
the largest facility management companies globally.
(2) All payments made to ProjectCo under the Project Agreement (PA) will originate from the Province,
entailing minimal counterparty credit risk.
(3) The security package provided by the DB Contractor for the construction phase is sizable and provides
considerable protection against non-performance. This includes a parent guarantee for 50% of the contract
price, a 50% performance bond and a 5% LC, placing the project’s construction phase comfortably in line
with the rating.
(4) A fairly tight lifecycle monitoring process is embedded in the contractual structure. Every year, ProjectCo
and the Service Provider will review the quality of the maintenance and lifecycle work performed over the
previous period. ProjectCo will compare the costs of the lifecycle work performed over the previous years
with the aggregate payments made to the contractor, and potentially withhold future payments to the Service
Provider if excess lifecycle payments exceed $1.250 million. In addition, if in Years 15, 18, 21 or 24 the
independent inspector determines that a deficiency exceeding $1.978 million is identified in the lifecycle
budget, the Service Provider will be required to fund the excess deficiency with cash or an LC.
(5) The Lenders’ Remedies Agreement and Lenders’ Direct Agreements within the contractual structure give
bondholders the right and reasonable time to step in and cure a default under the PA, the Design-Build
Agreement and the Services Contract before these agreements can be terminated. Furthermore, the cushion of
nine months between the Target Service Commencement Date and the Creditors’ Longstop Date is three
months less than the Longstop Date in the PA and should provide flexibility to allow lenders to step-in should
the need arise.
Challenges
(1) The construction phase entails the customary uncertainties pertaining to weather conditions, material and
labour availability given the relatively remote location of the site, as well as subcontractor performance risk.
The DB Contractor will be required to reserve for, and ultimately pay, Liquidated Damages (LD) in the event
of late completion. However, ProjectCo could be at risk if significant delays were encountered or the DB
Contractor had to be replaced.
(2) The overall contractual structure is standard for a PPP but complex and cumbersome relative to other
traditional infrastructure credits. This exposes ProjectCo to potential uncertainty with respect to the
interpretation of the agreements should a dispute arise among the parties.
(3) While typical of PPPs involving availability-based payments, the heavy debt burden carried by ProjectCo
leaves limited room to weather very low-probability but high-severity scenarios such as the replacement of
the DB Contractor at a significant premium. This is reflected in the debt-to-CFADS ratio expected to be
13.1 times post-service commencement and the minimum senior DSCR of 1.21 times projected over the life
of the project.
(4) Although unlikely, a replacement of the Service Provider because of a failure to meet the service
standards or financial difficulties encountered by its parent would likely lead to a re-pricing of the Service
Contract, which could erode financial metrics materially. This risk is somewhat mitigated by the security
posted by the Service Provider, deemed appropriate for the rating category.
3 Public Finance: Infrastructure
Plenary Justice
Okanagan LP
Report Date:
March 21, 2014
Contractual Framework
The contractual structure of the project is fairly standard for a PPP but somewhat cumbersome relative to
other infrastructure credits. However, the structure is familiar to the sponsors, the DB Contractor and the
Service Provider, all of which have considerable experience with PPPs. DBRS has reviewed all key
agreements and views the contractual structure as tight, with all agreements adequately complementing each
other while allowing for timely resolution of breaches and potential disputes, and the pass-down of risk to be
generally appropriate. DBRS notes, however, that for certain very low probability Relief Events with delayed
compensation, notably ionizing radiation and fuel shortage, the requirement for debt servicing is not passed
down to the DB Contractor. While ProjectCo keeps this risk, the transaction has been structured so that
sufficient funds will be retained by ProjectCo to cover debt service until the Target Service Commencement
Date, with no debt service coming due for the six-month period beyond that date. If the delay caused by the
Event continues for six months or more, ProjectCo may terminate the PA, with compensation from the
Province sufficient for senior debt repayment. Furthermore, the response times and cure periods allowed for
subcontractors during the service phase are often stricter than those faced by ProjectCo under the PA,
providing some flexibility for ProjectCo to respond to unexpected developments.
Province of British Columbia: The Province is the public sector counterparty to the PA and is represented
by the Ministry of Technology, Innovation and Citizens’ Services. The Province is rated AA (high) with a
Stable trend, well above the rating of ProjectCo.
ProjectCo: A special-purpose vehicle created solely for the project and wholly owned by Plenary Canadian
Holdings Inc., ProjectCo is structured as a limited partnership and, as such, is not taxable. As is standard for
PPPs, ProjectCo’s line of business is restricted to project-related activities.
Sponsor: The owner of ProjectCo is Plenary Canadian Holdings Inc., which will provide ProjectCo’s equity.
Established in Australia in 2004, Plenary Group is an independent company focusing on the delivery of
public infrastructure projects, and it is involved in all aspects of new projects. Its key principals own Plenary
Canadian Holdings Inc., with a representative group forming the ProjectCo board of directors and overseeing
ProjectCo’s management team. Plenary Group and its principals have had considerable success since
inception, with a sizable portfolio of assets in Australia and 12 PPP mandates in Canada, including justice
Design-Build Contractor"PCL"
(50% guarantee from PCL Group )
Project Agreement
Design-Build Agreement
Lenders'Remedies
Agreement
ProjectCo
Province of BritishColumbia
Bondholders
NoteIndenture
Service Provider"Honeywell"
(guarantee from Honeywell International up to 300% of annual
service fee on termination)
Services Contract
Sponsors
EquityCommitment
4 Public Finance: Infrastructure
Plenary Justice
Okanagan LP
Report Date:
March 21, 2014
and corrections-type facilities like the Thunder Bay Consolidated Courthouse in Thunder Bay, Ontario, and
the Communications Security Establishment Canada Long-Term Accommodation in Ottawa, Ontario.
DB Contractor: PCL Constructors Westcoast Inc. is a subsidiary of PCL and the entity retained by
ProjectCo to design and build the project under the fixed-price and date-certain DB Contract, with a 50%
performance guarantee from its parent. As Canada’s largest general contractor, PCL has annual construction
volume in excess of $6 billion and extensive experience with social infrastructure and PPPs, having been
involved in several corrections/justice projects in recent years, including the North Fraser Pretrial Centre in
British Columbia. DBRS is of the view that PCL exhibits credit characteristics consistent with a rating at the
high end of the BBB range.
Service Provider: Honeywell Limited (Canada), a subsidiary of Honeywell International Inc. (rated “A” by
DBRS), assumes on a back-to-back basis substantially all Facility Maintenance (FM), lifecycle and security
obligations under a 30-year fixed-price contract. Honeywell is a diversified technology and manufacturing
company and a leader in the provision of FM services, with annual revenues of USD 37 billion and
considerable experience with high-security facilities. Its experience includes many Canadian PPPs, including
Surrey Pretrial Services Centre in British Columbia.
Key Agreements
Project Agreement (PA) This is the master agreement through which the Province transfers to ProjectCo all responsibilities for
designing, building, financing and maintaining the OCC and providing lifecycle services for a term of 30
years, plus a scheduled construction phase of 31 months. Accordingly, ProjectCo agrees to design and build
the new facility in accordance with the output requirements, and to procure and install all required security
systems by September 30, 2016 (Target Service Commencement Date), and no later than the Longstop Date,
which is set at 12 months later. The PA passes down to ProjectCo all risks pertaining to inferable site
conditions, permits and approvals, weather conditions and cost overruns. Other construction-related
obligations include the provision of all required IT software and security equipment for a correctional facility.
The PA also outlines extensive operating and maintenance requirements for the service phase, beginning at
Service Commencement. These include routine and lifecycle maintenance of OCC and some of its
components and equipment, as well as grounds maintenance, utilities management, pest control, help desk,
and comprehensive IT and security services. Typical of PPPs, clear processes are outlined in the event of
scope changes, disputes among parties, a step-in by the Province or the Trustee if ProjectCo or a
subcontractor fails to perform.
The Province grants non-exclusive access to the site and facilities to ProjectCo and its related parties for the
term of the PA, and will make progress payments during construction that do not exceed the lesser of a
prescribed amount or 40% of eligible costs incurred monthly. During the service phase, the Province will
make monthly payments for the provision of the services, which may be subject to adjustments for failure to
meet the service standards. Typical of PPPs, the risks retained by the government counterparty are limited
and mostly relate to site availability; existing ground contamination; discriminatory changes in law, except
for a Relevant Works Change in Law, which is a risk shared with ProjectCo; and damages incurred by
ProjectCo under a fairly standard range of Relief, Compensation, Excusing and Force Majeure events. The
ProjectCo and Province Events of Default that could potentially lead to a termination of the PA are customary
and often incorporate a modest cure period (generally 20 business days). Termination can also be triggered
upon an extended event of Force Majeure or Relief or at the full discretion of the Province, and in each case
would require some form of compensation to ProjectCo sufficient to cover senior debt repayment. DBRS
notes that the Province may assign this agreement without the consent of ProjectCo, but will remain liable for
all of its obligations.
Design-Build Agreement This is a fixed-price, date-certain contract between ProjectCo and the DB Contractor, through which virtually
all risks and responsibilities entrusted to ProjectCo under the PA for the design, construction and
commissioning of the facility and its equipment are transferred on a back-to-back basis to the DB Contractor.
5 Public Finance: Infrastructure
Plenary Justice
Okanagan LP
Report Date:
March 21, 2014
ProjectCo agrees to pass down to the DB Contractor its rights of access to the site and the facility and any
potential relief, compensation and penalties from the Province, and commits to exercising its rights and
claiming those defences under the PA that are for the benefit of the DB Contractor. The total cost of the DB
work is set at $166 million, payable through monthly progress payments to the DB Contractor in accordance
with pre-established drawdown schedules and is subject to customary conditions, including a more-
comprehensive-than-usual LTA certification process. Service Commencement of the facility is scheduled for
September 30, 2016 (Date for Financial Completion), but will be no later than the Sunset Date or nine months
after Service Commencement, which is three months before the Longstop Date under the PA.
Typical of PPPs, the DB Agreement mirrors most construction-related sections of the PA, including the
output specifications, which are directly copied from the PA, and the relevant Events of Default. However,
the response times and cure periods available to the DB Contractor are generally the same as under the PA.
This provides limited buffer to ProjectCo to address unexpected issues; however, the DB Contractor is most
often considered to be the best suitable entity to respond and cure these issues. The agreement automatically
terminates upon termination of the PA but allows for contractor and guarantor replacement in the event of the
bankruptcy of either the DB Contractor or PCL. In the event of a delay in reaching Service Commencement,
the DB Contractor will pay to ProjectCo LDs sufficient to cover all of ProjectCo’s operating and financial
obligations, including debt servicing, on a monthly basis. The DB Contractor will ensure that all subcontracts
entitle ProjectCo, the lenders or the Province to take an assignment of all rights under such contracts if the
DB Contractor is terminated. The liability of the DB Contractor under the contract is capped at 50% of the
contract price, including up to 12 months’ worth of LDs (six months of Completion LDs plus the 5% LC).
Services Contract The Services Contract transfers all day-to-day facility maintenance and lifecycle responsibilities set out under
the PA to the Service Provider on a fixed-price, back-to-back basis. Upon reaching Service Commencement,
all FM service requirements will commence, including routine and lifecycle maintenance of the facility and
its equipment and the IT/security infrastructure. Service responsibilities also include grounds maintenance
and landscaping services, utilities management, waste management and recycling services, pest control, help
desk and comprehensive IT and security services. ProjectCo only retains responsibility for general
management, performance monitoring and the maintenance of certain insurances.
ProjectCo will make monthly payments to the Service Provider, which will be subject to deductions for
failure to meet service standards unless caused by ProjectCo. The agreement incorporates the same payment
indexation factors and adjustments as under the PA and does not entitle the Service Provider to any
compensation if the facility is delayed, unless caused by ProjectCo. The agreement passes down customary
relief for Force Majeure, Compensation, Excusing or Relief events, and mirrors the various processes in place
under the PA to address scope changes and disputes among parties or to allow the Trustee to step in and cure
a breach of obligations. Events of Default are similar to the ProjectCo Events of Default relevant to the
service phase under the PA. The response times available to the Service Provider are often the same as those
defined in the PA, although the deduction thresholds for (i) increased monitoring, (ii) Province step-in and (iii)
default are set 20% lower than the thresholds specified in the PA, providing a buffer for ProjectCo.
The Service Provider is required to provide a performance security package to ProjectCo, which could be
used to cover a contractor replacement premium, and will ensure that all subcontracts entitle ProjectCo, the
lenders or the Province to take an assignment of its rights under such subcontracts if the Service Provider is
terminated. The liability of the Service Provider is capped at 300% of average annual FM and lifecycle
payments, and a LC in an amount equal to 50% of the average annual FM and lifecycle payments is required
in the agreement. DBRS notes that relief and compensation are only available to the Service Provider to the
extent that the same is received by ProjectCo under the PA, unless the issue is caused by ProjectCo.
Furthermore, if the PA is terminated, any compensation received by ProjectCo must first be used to repay
senior and junior bondholders before any payment is made to the contractor.
6 Public Finance: Infrastructure
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Okanagan LP
Report Date:
March 21, 2014
Lenders’ Remedies Agreement Schedule 10 of the PA, the Lenders’ Remedies Agreement, is between the Province, ProjectCo and the
Trustee. It acknowledges the security interest granted to the Trustee and sets out the powers available to
bondholders in the event of a default of ProjectCo under the PA. Before terminating the PA, the Province
must inform the Trustee of any ProjectCo default and provide it with at least 90 days to initiate a step-in and
proceed to cure the default if the default is under the PA, or 60 days if the default is under the financing
documents. If a step-in is pursued, the Province will only be entitled to terminate the PA if any of the
following occurs: (1) Service Commencement is delayed beyond 180 days after the Longstop Date,
(2) the breach is not being diligently remedied, (3) certain amounts owed to the Province remain unpaid or (4)
the terms of the PA are not respected during the step-in period. As a result, a step-in could effectively extend
the construction phase by up to 180 days beyond the Longstop Date. The agreement also allows the Trustee
to replace ProjectCo at any time during the notice period or step-in period, or upon an Event of Default under
the financing documents. Similar agreements are in place under the Design-Build Agreement as well as the
Services Contract, providing the Trustee with 60 days under the DB Agreement and up to 180 days under
the Services Contract to step in and attempt to either cure a ProjectCo Event of Default or replace ProjectCo.
Dispute Resolution Procedure Schedule 13 to the PA, the Dispute Resolution Procedure, provides a framework for the Province and
ProjectCo to resolve disputes at the lowest possible level of escalation. Accordingly, any dispute related to
the design and construction work, scope change, service or unavailability failures, minor work or a renovation
shall be settled as follows: (1) Representatives of each party first attempt to amicably resolve the issue within
five business days of receiving a Dispute Notice (or longer, if mutually agreed). (2) If the discussions fail to
lead to a solution within this period, the issue is then referred to a Referee (Independent Certifier or another
person as agreed between parties), who has five business days (or longer, if mutually agreed) to render a brief
decision, which is not binding on the parties. (3) If the dispute remains unresolved or if either party wishes to
arbitrate a dispute decided by the Referee, the issue can then be referred (within ten days from Referee
decision or longer, if mutually agreed) to an arbitrator, who will deliver a decision 15 business days after
conclusion of hearings. If either party does not indicate its intention or objects to resolving the dispute
through arbitration, then either party may commence proceedings in respect of the dispute in the courts of
British Columbia.
It is worth noting that the decision of the Independent Certifier that Service Commencement has been
achieved is final and binding on the parties, and such decision will not be the subject of a Dispute and will not
be subject to the Dispute Resolution Procedure.
Very similar processes are provided under the Design-Build Agreement and Services Contract, with all
parties bound by any determination under the PA’s dispute resolution procedure.
7 Public Finance: Infrastructure
Plenary Justice
Okanagan LP
Report Date:
March 21, 2014
Project Overview
The project entails the design and construction of a three-storey correctional centre of approximately 29,500
square-metres on a 36-acre site near Penticton, British Columbia. The site is owned by the Osoyoos Indian Band
(OIB) who has leased the subject lands to the Province for the purposes of the project (the Lands). The Province
in turn will provide ProjectCo licence to these lands as a condition to reaching financial close. The facility will
consist of three pods with 12 living units containing the majority of the inmate cells and a separate central
administration and services building, which will accommodate support and ancillary functions as well as a small
number of special cells. The total number of cells is 465 with a maximum capacity of around 867 inmates. The
construction phase of 31 months is projected to start in March 2014, and reach Service Commencement on
September 30th, 2016, at which time the 30-year service phase will begin with the delivery of facility
management and lifecycle services.
Construction Phase
Customary to PPPs, virtually all of ProjectCo’s construction obligations and risks outlined under the PA are
passed down on a back-to-back basis to the DB Contractor under a fixed-price and date-certain contract valued
at $166 million. This includes standard design, construction and utility-related obligations, LEED Gold
certification, and procurement and installation of all IT and security system equipment. Honeywell (the Service
Provider) will be involved in the security system installation, commissioning and licensing as a subcontractor
during the construction phase, and will eventually assume the licences, maintenance and lifecycle services of
this system upon achievement of Service Commencement. The security component of this project represents
about 8% of total capital costs and is similar in complexity and functionality to those found at other correctional
facilities in B.C. The notable risks retained by ProjectCo during the construction phase relate to Relevant Works
Change in Law and certain types of Relief Events. For Relevant Works Change in Law that requires capital
expenditures, ProjectCo will establish a reserve account shortly after Service Commencement to cover 80% of
the exposure under the PA as a result of such events ($1 million), using tax rebates. The remaining 20% will be
accumulated through interest collected on this account; hence, the reserve will only become fully funded
approximately 13.5 years after Service Commencement. This approach is unusual and represents a potential risk
exposure to ProjectCo, although the size of the remaining unfunded balance of this reserve before first debt
service payment is relatively small and can easily be covered with free cashflows. As for entitlement upon
occurrence of a Relief Event, ProjectCo and senior debt payments are not protected under the PA for all types of
Relief Events resulting in delay to the original Service Commencement date. Nonetheless, the majority of those
Relief Events not protected by the Province have been passed down to the DB Contractor except the following
three: (i) ionizing radiation, which is considered very low risk in a correctional centre; (ii) accidental loss or
damage that will be covered by insurance; and (iii) failure or shortage of fuel, which is deemed to be a very low
risk despite the relatively remote location of the site.
The construction task is assessed to be of low-to-moderate complexity. The relatively straightforward
construction of the detention centre is overlaid with a number of requirements, including specialized security
systems and IT requirements. DBRS notes that the PA specifically contains provisions requiring ProjectCo to
acknowledge that it will be constructing a facility that will be subject to higher levels of wear and tear and
vandalism. This has been passed down to the DB Contractor. Another unique aspect of this PA relates to the
allocation of risks associated with participants in protest actions and trespassers. ProjectCo will be responsible
for the management of participants in protest actions and trespassers during the construction phase.
Compensation for pertinent direct losses (exceeding $100,000) is provided by the Province, but time extensions
are only granted after ProjectCo has demonstrated that the protest or trespass continues to occupy the site for
more than seven days after all legal remedies available to it have been exhausted. This risk is tempered by the
availability of an executed lease agreement with the OIB approving the construction of a correctional facility on
the Lands and has been dropped down to the DB Contractor, which has commensurately priced the risk in its
contract price. ProjectCo has already met with OIB, including the band chief, to discuss design principles related
to the character of the facility within the context of the overall Senkulmen Business Park. The 475-member band
appears to be entrepreneurial, running nine businesses and employing hundreds of people in various sectors with
considerable revenue growth over recent years. ProjectCo and OIB have also discussed the possibility for labour
and material supply by the band through a competitive tendering process.
8 Public Finance: Infrastructure
Plenary Justice
Okanagan LP
Report Date:
March 21, 2014
The DB Contractor plans to subcontract 85% of the work, and has obtained firm price commitments for about
50% of the project scope, including mechanical and electrical work. Responsibilities self-performed by the
DB Contractor include project management, maintaining insurance and commissioning of the facility. Similar
to other correctional centre projects, there is a requirement for workers to have enhanced security
classifications, the requirements of which consist mainly of law enforcement database and criminal record
checks.
The property is situated adjacent to Highway 97, seven kilometers north of Oliver, B.C. The project’s
location is somewhat remote from major metropolitan areas. However, Okanagan Valley where the site is
located has been witnessing the delivery of a few large scale construction projects such as the Kelowna-
Vernon Hospitals and the ongoing Interior Heart Surgical Centre, with no major labour or material issues.
The Project will be constructed in the Senkulmen Business Park, which is situated on land owned by the OIB,
for which a 60-year lease (extendible to 80 years) was recently negotiated between the OIB and the Province.
There are a few species at risk on or near the project site (Behr’s Hairstreak, Western Rattlesnake and Gopher
Snake) for which the necessary permits were provided by the Province. Archaeological assessments were
conducted on the site, and no resources of concern or further assessment needs were identified. An
environmental assessment has been performed, and appropriate mitigation measures should keep the
environmental risk at a low level. Geotechnical conditions on the site are generally suitable to the type of
construction envisioned (spread and strip footings), and the native granular soils are generally suitable for
structural fill. Site drainage is not considered to be an issue considering the draining granular soil types
present and the low water table in the area.
The construction task will span roughly 31 months and is based on five-day weeks and single work shifts.
Although schedule float was not disclosed, the LTA has noted that it considers the construction schedule to
be of a reasonable duration for a project of this size and type. There are no local ordinances in place that
would interfere with accelerating construction activities, and no residential properties are in the immediate
vicinity. The project will feature offsite precast construction of inmate cells typically providing schedule and
quality control efficiencies. Site work and construction activities are planned to start in August and
September 2014, respectively. Pods A, B and C are expected to take 11 months each to construct, running
relatively in parallel over a total period of 15 months. The central services building will also be concurrently
constructed but over a period of 19 months. A period of 11 months is provided for the installation of the
security systems, and five months have been allocated for commissioning, which is in line with the duration
typically seen for hospital projects. At present, the critical path runs through the Design Development, Site
Setup, Pod C Structure and Interiors, Pod B Foundations, Pod A Structure, Central Services Building
Structure and Interiors and final security and commissioning activities.
Under the Design-Build Agreement, PCL is in default if it fails to achieve Service Commencement within
nine months of the Target Service Commencement Date, which is concurrent with the Creditors’ Longstop
Date and three months prior to default under the Project Agreement. There will also be a DB Event of Default
if at any time after 12 months prior to the Sunset Date (nine months after Target Service Commencement), it
is determined that Service Commencement is not expected to be achieved prior to the PA Longstop Date.
This should provide bondholders a measure of protection, provided that this date is set at a suitable threshold.
DBRS notes that the agreement allows ProjectCo to provision for anticipated LD if, starting nine months
prior to the Service Commencement Date, the LTA determines that a construction delay is likely to occur.
The maximum completion LD held by ProjectCo plus the 5% LC provided by the DB Contractor would
provide adequate liquidity to reach the Longstop Date.
9 Public Finance: Infrastructure
Plenary Justice
Okanagan LP
Report Date:
March 21, 2014
During the construction phase,
the Province will make monthly
contribution payments not to
exceed 40% of the construction
costs to date at the end of each
month, subject to a cumulative
maximum of $72.3 million. The
DB Contractor will receive
monthly progress payments from
ProjectCo, which will be funded
with the proceeds of the senior
notes and the above-noted
provincial funding. The draw
curve is featured in the figure to
the left. Subject to the 10%
legislative holdback, the progress
payments will be made as per the
project cash flow schedule and,
subject to customary certifications by the LTA, include, amongst other requirements, that Service
Commencement is likely to occur on the targeted date or if not, by the Creditors Longstop Date; no funding
shortfall exists; all claimed project costs do not exceed the amounts prescribed in the draw curve; progress
does not vary from schedule; and payments made are to cover costs actually incurred.
Upon completion of construction, there is a one-year warranty against defects and a 15-year warranty against
latent defects (the latter stipulated by B.C. law, and somewhat longer than seen in other jurisdictions). As is
usual, the project is required to achieve LEED certification, although DBRS notes that for the OCC, LEED
Gold is required. However, a three-year window post-Service Commencement is provided, which is more
permissive than typical by one to two years. The inability to achieve LEED certification does not result in
default but rather in the requirement to pay liquidated damages, up to a maximum of $1 million, dependent
upon how many credits are missing. These requirements have been passed down to the DB Contractor.
Performance Security
The DB Contractor has provided a parent guarantee for up to 50% of the contract price from PCL along with
an LC from a Canadian Schedule 1 bank rated at least A (low) or ATB Financial, in an amount equal to 5%
of the contract price (about 5.5 months of LDs). The whole project also benefits from a 50% performance
bond provided by Chubb Insurance Company of Canada, Travelers Guarantee Company of Canada and
Zurich Insurance Company of Canada Ltd. on a joint and several basis. In contrast to the traditional bond, this
performance bond also covers LDs, providing an added incentive to the insurers to address any problem in a
timely fashion. Subcontractors with contract values worth less than $2.5 million are covered under PCL’s
Subguard policy, whereas larger subtrades such as mechanical and electrical (M&E) will be covered by
bonding. However, the subguard coverage and bonding on large subtrades (such as M&E subcontractor) are
not for the benefit of ProjectCo, and as per DBRS’s methodology, provide no uplift to the construction phase
rating. DBRS considers this package to be in excess of what is typically seen for this rating category and
provides substantial security for the construction phase of the project.
Lenders’ Technical Advisor Review
The LTA (BTY Consultancy Group Inc.) deems the design and construction obligations to be standard and
considers the construction phase to be of low-to-moderate complexity with no material concerns raised
relative to that portion of the project. The LTA notes that the project involves design and construction of a
facility subject to higher-than-average wear and tear in addition to the implementation of specific security
systems and components. However, these elements do not materially increase the overall complexity of the
construction phase, which is believed to be somewhat lower than for a hospital project, for example. The
LTA has opined that the project schedule follows a logical sequence of activities with reasonable free floats
per activity, and views the project budget presented by the DB Contractor as reasonable and sufficient to
complete the work, with total capital cost ($5,627/m2) being just above the average of the expected
10 Public Finance: Infrastructure
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benchmark range for comparable projects ($4,921/m2 to $6,129/m
2). Based on the replacement scenarios
assessment, adequate liquid coverage is deemed to be available except in month ten of construction. However,
this does not take the performance bonding into consideration and assumes that the DB Contractor and the
parent company both become insolvent.
Service Phase The service phase spans a typical 30-year period and formally begins at Service Commencement scheduled
for September 30, 2016. Key responsibilities outlined under the PA comprise facility maintenance and
lifecycle services for the correctional centre, including secure areas. ProjectCo will also be responsible for the
provision of some soft facility management services, including cleaning of non-secure areas and the oversight
(but not direction) of the cleaning of secure areas by inmates. Nonetheless, ProjectCo and the Service
Provider will not incur deductions for any work performed by inmates. Other specific responsibilities during
the service phase include plant services, maintenance and support of all security systems and software,
videoconferencing capabilities, pest control, provision of help desk, utilities management, and roads and
grounds maintenance, including snow removal.
As noted in the construction phase analysis, there is a requirement for staff to have the proper security
clearance, and breaches of security-related matters (i.e., allowing non-cleared and non-escorted individuals
into particular areas, except in the case of an emergency) can lead to immediate termination. While this will
require ongoing diligence by the Service Provider, given the nature of the facility, it is not considered to be an
unduly challenging requirement. Also, during the life of the facility, blockades and embargos short of a
protest action are Relief Events that provide relief from termination by the Province and will, after 180 days,
give ProjectCo the right to unilaterally terminate the Project Agreement with full compensation to
bondholders.
ProjectCo only retains responsibility
for certain insurances, general
management and financial reporting
responsibilities. All FM and lifecycle
responsibilities pertaining to the
facilities and their equipment have
been passed down on a back-to-back
basis to the Service Provider (a
subsidiary of Honeywell International
Inc.), which will self-perform the
majority of the services scope (around
70%), under a fixed-price 30-year
contract. As expected, the Services
Contract mirrors the relevant sections
of the PA, including the output
specifications, and passes down, on a
back-to-back basis, deductions for
failure to meet service specifications,
unless they are caused by ProjectCo. It also flows through other payment adjustments, such as the Diesel Fuel
Services Payment and the Snow Ploughing Services Payment through a payment mechanism similar to the one
under the PA. The total FM and facility lifecycle budgets are $75.6 million and $48.2 million in nominal terms,
respectively, which are within the expected range on a per-square-metre basis for similar facilities. The security
equipment required to be provided and maintained is fairly standard for a correctional facility. The lifecycle profile
for the security system forms 14% of the total lifecycle costs of the project and is characterised by relatively
significant investment every six years approximately, comprising replacement of significant components like
cameras, controls and servers. Part of the reason for this is the constant improvement in technology and software
that necessitates ongoing investment in the system. Other major lifecycle expenditures are noted around Year 12
for interim repair work related to HVAC, then Years 18 to 20 for exterior finish and hard surface replacements, and
afterwards in Years 24 and 25 for mechanical / electrical services.
11 Public Finance: Infrastructure
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Every year, ProjectCo and the Service Provider will review the quality of the maintenance and lifecycle work
performed during the previous period and update the maintenance and lifecycle plans for the next calendar year
accordingly. ProjectCo will compare the costs of the lifecycle work performed over the previous years with
the aggregate payments made to the contractor, and potentially withhold future payments to the Service
Provider if excess lifecycle payments exceed $1.250 Million. In addition, if in Years 15, 18, 21 or 24 the
independent inspector determines that a deficiency exceeding $1.978 million is identified in the remaining
lifecycle budget, the Service Provider will be required to fund the excess deficiency with cash or an LC or
have subsequent lifecycle payments withheld. The lifecycle look-forward inspections will be undertaken in
advance of the Year 27 inspection required under the PA, and should address any lifecycle deficiencies
before they are captured by the payment mechanism under the PA. As a proportion of the construction price,
the nominal lifecycle budget is approximately 29%, which is within the expected range. DBRS’s discussion of
the FM lifecycle strategy with Honeywell highlighted a thorough planning process based on an extensive review
of the project requirements, incorporating considerations for the special nature of the facility, market conditions
and historical data points from similar projects managed by Honeywell in Canada and in the United States.
Service Payment Mechanism
Full payments, including the lifecycle component, are set to begin at Service Commencement of the facility.
Payments will include (i) a non-indexed debt servicing component and indexed FM and lifecycle components on
the basis of the consumer price index (CPI) funded in advance of each payment period as well as (ii) diesel fuel
service payments and snow ploughing and removal services payments made in arrears. Unlike some of the other
B.C. PPPs, there is no benchmarking mechanism in this project agreement of certain facility maintenance
services.
Payments will be subject to penalties if energy consumption exceeds projected levels by more than 3% or if the
energy mix is materially different from the targeted mix. More importantly, deductions will apply if ProjectCo fails
to provide a service (Service Failure) or make a part of the facility safely available (Unavailability Event). The
deductions for a Service Failure range from $500 to $3,000 if not rectified within the allowed period (generally four
to 24 hours), depending on the severity of the failure. For facility Unavailability Events, deductions range from $25
to $300 per affected unit for each permitted rectification period during which the issue remains unresolved
(generally two to 48 hours). Monthly deductions are capped at the FM monthly service payment, and deductions
for FM failures during the first three months following the completion of the facility will be reduced on a declining
basis by 75%, 50% and 25%, respectively. Modest revenues are also expected to be generated from reserves and
cash balances, which are conservatively assumed to be invested at a rate of 1.7% per year.
ProjectCo is expected to retain about 65% of total payments from the Province to cover debt servicing,
overhead and return on equity. The balance will be passed down to the Service Provider through a payment
mechanism similar to the one under the PA, including energy gainshare or painshare and applicable payment
indexation and deductions, unless caused by ProjectCo. DBRS notes that ProjectCo is not required to
compensate the Service Provider if the start of the service phase is delayed and only has to pass down
compensation or relief when received from the Province unless the issue is caused by ProjectCo.
Similar to other British Columbia PPP structures, deductions are used as a way of monitoring performance.
Accordingly, the Province would be allowed to increase its monitoring of ProjectCo, to step in and rectify
deficiencies itself or to require the replacement of the Service Provider if certain deduction thresholds are
exceeded over a two-month or six-month period. In addition, deductions exceeding $1.0 million for facility
failures incurred over a 12-month period would give the Province the right to terminate the PA. The
thresholds for increased monitoring, Province step-in and default under the Services Contract are 20% lower
than under the PA, providing ProjectCo with a cushion to act before the PA becomes compromised.
Theoperating standards are considered commensurate to the nature of this correctional facility. Similar to
other PPPs, most events are preventable under proactive management. Furthermore, the framework provides
for reasonable rectification times for Unavailability Events. As a result, failures are unlikely to place
excessive stress on financial ratios.
12 Public Finance: Infrastructure
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Report Date:
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Performance Security
A parent performance guarantee for an amount equal to 300% of average annual FM and lifecycle payments,
and an LC in an amount equal to 50% of the average annual FM and lifecycle payments, which must be
replenished if drawn, will be provided by the Service Provider to secure its performance. This package is
somewhat larger than seen in recent “A”-range PPPs and, combined with the credit quality of the guarantor
(rated “A”) and the tight lifecycle inspection mechanism, is viewed as more than adequate for the rating.
Technical Advisor Review
Overall, the service phase is viewed by the LTA as standard for a correctional centre project, with the service
requirements being considered as reasonable for a correctional centre. The high-security aspect of the facility
will make the environment more challenging than the typical availability-based PPP as it increases operating
and staffing requirements, but the overall complexity of the tasks is not high and seems fairly mechanical.
The LTA does not view the deduction regime as onerous but rather consistent with other comparable projects in
B.C. Risk to ProjectCo related to the payment mechanism is considered to be low. The triggers for the Province
to have the right of step in and force a replacement are well short of the termination thresholds in the PA. In a
replacement scenario, the LTA estimates a three-month period to replace the Service Provider and deems the
5% LC, Honeywell’s parent guarantee and the liability cap to be sufficient for all potential default and
replacement scenarios.
The LTA considers the operating and maintenance (O&M) costs of $54.73/m2 per year to be slightly below the
benchmark range ($54.9/m2 to $71.4/m
2), although the differential is minimal relative to two of the three
comparable projects considered. It also views the lifecycle costs per square foot per annum of $31.94/m2/annum to
be within the benchmark range of $24.01/m2 and $39.99/m
2 per annum. The LTA views Honeywell’s facility
maintenance and performance monitoring to be well planned and representative of best management practices.
Similarly, the lifecycle plan is considered to be robust and handback requirements not unduly onerous for an
experienced service provider such as Honeywell.
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Project Risk Allocation
The table below summarizes the allocation of the key risks and responsibilities among the major project
participants, specific to the construction and service phases.
Financial Profile
The total budget to carry the project to Service Commencement is set at $198.2 million. This includes
$166 million for the fixed-price DB Agreement, $13.5 million for debt servicing and financing charges,
$3.7 million for ProjectCo expenses incurred during the construction phase, and $3.6 million to fund the six-
month debt service reserve account (DSRA) at Service Commencement.
Primary Risk & Responsibility Allocation Mattrix
Province PCo DB SP Remarks
* DB pays PCo for delay but PCo at risk if delay > 12 months
* Liability capped at 50% of contract price
DB to obtain permits for DB activities & comply w ith CEA
Report, SARA & Wildlife Act Permits obtained by Province
Licence to Lands is provided by Province
(Province leased Lands from First Nations for 60 years)
Compensation for Undisclosed Environmental Liabilities
Subsurface conditions considered not challenging by LTA
Relief Event for Extreme w eather
Relief Event
Compensation Event if PA not terminated
Compensation Event
* -
LTA deems DB credit enhancement package to be adequate
for replacement purposes
Authority covers cost inflation for lifecycle and maintenance
payment components
* LTA has opined that deduction thresholds are reasonable
Tight lifecycle inspection & reserving mechanism
Structural defects PCo responsible after expiry of 1-year DB w arranty
Policy premium is pass-through
Service payments continue if services delivered; event
persisting beyond 180 days becomes Compensation Event
Compensation for direct losses & a share of allow able CapEx
TA: w ould likely require about three months
= main responsibility for risk; * = partial exposure to risk.
PCo = Pro jectCo; DB = Design-Build Contractor; SP = Service Provider
C o mpensat io n Events : generally entitle Pro jectCo to compensation for losses so that it is no better or worse off.
F o rce M ajeure: if before substantial completion, entitles Pro jectCo to extension to key pro ject dates (except Expiry Date) and possibly to
compensation if persists or expected to persist for 180 days; if after substantial completion, deductions remain in force.
R elief Events : if before substantial completion, all key pro ject dates (except Expiry Date) are postponed and, for an industry strike, a blockade
or failure by a utility company or local authority to perform, the Crown covers senior debt servicing (DB Contractor covers
senior debt servicing for most o ther Relief Events). If after substantial completion, no termination of the PA; payments continue
if service delivery continues. No compensation provided although certain Relief Events may also constitute an Excusing Event.
Excusing Events (only during operating phase): entitle Pro jectCo to relief from payment deduction or breach under PA.
*
Maintenance of insurance
Cost inflation
Performance standards
Industry strike
Force Majeure
Construction Phase
Schedule overruns
Cost overruns
Permits & approvals
Land acquisition
Lifecycle & handback
Archaeological f inds
Insurance maintenance
*
Replacement of contractor
Force Majeure
Change in Law
Environmental issues
Geotechnical issues
Weather conditions
Design
Service Phase
Replacement of contractor
*
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A fully amortizing, 32.6-year, $114.5 million Series A Senior Notes will be issued at financial close
comprising 90.5% of the total capital structure (excluding the provincial funding). During construction, the
Province will make monthly contribution payments not to exceed 40% of the construction costs to date at the
end of each month, subject to a cumulative maximum of $72.3 million over the construction period. Other
sources of funding will include an equity contribution of $12.0 million that will be back-ended and supported
by a letter of credit that may be drawn if equity is not contributed as planned or upon a ProjectCo Event of
Default.
The Senior Notes will mature six months before the expiry of the PA, which is consistent with market standards,
and will be serviced quarterly. The Note Indenture will require, among other things, (1) a six-month DSRA, (2)
fully funded reserves and a minimum DSCR of 1.15 times for any dividend to be paid out, (3) that any additional
senior debt be subject to Trustees’ and Senior Noteholders’ consent and (4) a fully funded Lifecycle Account.
As is common for PPPs, payments received from the Province for ProjectCo costs, contract management,
administrative service, and rehabilitation costs will all be indexed to CPI while the capital component of the
service payments, covering debt service and equity return, will be fixed. The payment stream from the
Province will be “lumpy” but matches the timing of the life cycle requirements and should be fairly
predictable.
Further comfort is provided by the
tight lifecycle inspection and dynamic
reserving mechanism embedded in the
Services Contract that requires the
Service Provider to reserve for any
shortfall in excess of $1.978 million
identified in the lifecycle budget during
the inspections conducted in Years 15, 18, 21 or 24. These features should provide considerable protection
against shock to ProjectCo’s cash flow available for debt servicing (CFADS). The Senior Notes will carry a
fixed rate with softly sculpted principal repayments, providing for a stable DSCR of 1.21 times, which is
comparable with other “A”-range accommodation PPPs completed in recent years. Debt-to-CFADS will start
at a somewhat high level of 13.1 times in Year 1, but it should slowly decline in the years ahead as debt
amortizes. A six-month debt service reserve ($3.6 million) will be in place to cushion unexpected shocks.
DBRS’s break-even analysis also points to good financial resilience at the ProjectCo level during the service
phase and highlights the benefits of contractor diversification as ProjectCo will pass down risks to a high-
quality service provider. Accordingly, ProjectCo could sustain either of the shocks highlighted below while
maintaining a DSCR of at least 1.0 time.
Construction Cash Flow Table ($millions)
Uses of Funds ($millions) % of total Sources of Funds ($millions) % of total
Design and Construction Costs 166.0$ 83.5% Equity 12.0$ 6.0%
Interest & Financing Fees 13.5$ 6.8% Provincial Funding 72.3$ 36.4%
ProjectCo Operating Costs 3.7$ 1.9% Long Term Bonds 114.5$ 57.6%
Senior DSRA 3.6$ 1.8%
Other Fees & Expenese 12.0$ 6.1%
Total 198.9$ 100.0% Total 198.9$ 100.0%
Re-pricing of O&M services budget due to contractor replacement
Re-pricing of lifecycle budget due to contractor replacement
Re-pricing of DB Contract due to contractor replacement
Events Maximum Shock
44.0%
46.0%
14.0%
Year 1* Year 5 Year 10
Total debt (millions) $112.7 $104.2 $91.2
Debt-to-CFADS (times) 13.1 12.1 10.6
DSCR (times) 1.21 1.21 1.21
* First 12 months of normalized results (ended September 30th, 2017)
15 Public Finance: Infrastructure
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Overall, the key financial metrics and break-even results point to good flexibility to absorb unexpected
shocks. While the service phase is marked by heavy security requirements, DBRS takes comfort in the
service standards, which are not viewed as unusually complex for a correctional centre, the mechanisms in
place to limit erosion in lifecycle performance and the allocation of FM obligations to a high-quality service
provider, which has considerable experience on similar projects.
Termination & Compensation
The Events of Default and the termination framework under the PA are customary, and a cure period is
provided for many breaches that can be remedied (often 20 business days), although some events, such as the
bankruptcy of ProjectCo or the inability to reach Service Commencement by the date that is six months after
the Longstop Date, have the potential to lead to immediate termination of the PA. However, the Lenders’
Remedies Agreement provides an opportunity for the Trustee to step in and cure any breach (which may
involve replacing ProjectCo) before the Province can terminate the PA. Upon termination, ProjectCo may be
entitled to compensation from the Province under the PA, which is a distinctive feature of PPPs. The size of
such payment depends on the party responsible for the event and the circumstances leading to the termination.
If ProjectCo is not the cause of the termination, compensation is generally expected to be sufficient to at least
repay senior debt and cover accrued interest, make-whole premiums and ProjectCo costs resulting from the
termination.
Termination can be requested in the following situations:
By the Province: For convenience; damage to either facility costing more than $5 million (index-linked)
and the Province elects not to reinstate; third-party liability risk becoming uninsurable; or upon an
unremedied ProjectCo Event of Default, which includes, among other scenarios, failure to pay any amount
due to the Province or to maintain insurance; insolvency of ProjectCo; abandonment of the project; failure
to achieve Service Commencement by the Longstop Date (365 days after the originally targeted date); a
final determination made pursuant to a dispute resolution within 12 months prior to Service
Commencement that Service Commencement is not reasonably expected before the Longstop Date;
prohibited assignment or change of control; breach of the refinancing rules; accumulation of deductions of
$1 Million (index linked) or more; or a breach related to security sensitive work.
By ProjectCo: For damage to either facility costing more than $5 million (index-linked), when such costs
are not covered by insurance proceeds and are expected to breach ProjectCo’s financial covenants; or for an
unremedied Province Event of Default, which includes failure to pay any amount due to ProjectCo within
ten business days; expropriation of ProjectCo by the Province or any Government Authority; a breach of
any term under the PA that has an adverse effect on the performance of the construction work of the
services; or a breach of limitations on assignment.
By Either Party for No-Fault: For a Force Majeure or Rrelief Event continuing for 180 days, for complete
or substantial destruction of the facility if the cost of repairs exceeds insurance coverage or for uncollectible
insurance receivables.
16 Public Finance: Infrastructure
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In addition to the above-mentioned compensation, DBRS notes that upon a termination triggered by the DB
Contractor or the Service Provider, ProjectCo would be entitled to compensation from that contractor for
damages incurred, including the cost of replacing the contractor subject to the contract’s liability cap.
Key Features of the Trust Indenture
Series A Senior Notes: $114.5 million senior bond maturing on March 31, 2046, which is six months before
the expiry of the PA. The Bonds initially pay interest only, with quarterly principal and interest payments
beginning approximately three months after the target service commencement date .
Ranking: The Short-Term Senior Bonds, the Series A Long-Term Senior Bonds and the Series B Long-
Term Senior Bonds rank equally and pari passu.
Security: First-ranking security interest in all property of ProjectCo and project accounts. The security
also includes a first-ranking security interest in all of ProjectCo’s rights under all major agreements and
related performance security, licences and bank accounts, and in all property of the General Partner and in
the shares of ProjectCo and its General Partner.
Key Accounts
Senior Notes Proceeds Escrow Account: Account in the name of ProjectCo but controlled by the Trustee
under the Blocked Account Agreement and holding the senior notes proceeds. Funds will be released monthly
to the Funding Account in accordance to the pre-established drawdown schedule to pay for project costs.
Funding Account: Account in the name of ProjectCo but controlled by the Trustee under the Blocked Account
Agreement. The Funding Account will receive the senior bond proceeds, amounts transferred from the Equity
Commitment Accounts and the Construction Progress Payments from the Province. Funds will be used to
service the senior debt during construction and will be released monthly to the Construction Account to pay
for the work, provided that certain conditions are met, including the LTA certifying, among other things, that
progress does not vary materially from the construction schedule and Service Commencement is likely to
occur on or prior to the Creditor’s Longstop Date (three months before the PA’s Longstop Date), the costs
billed to date are for actual work performed and in aggregate are consistent with the financial model, and there
is no funding shortfall. The remaining balance in the Funding Account will be transferred to the Proceeds
Account.
Construction Account: Account in the name of ProjectCo but controlled by the Trustee under the Blocked
Account Agreement and holding draws from the Funding Account to pay the DB Contractor.
Proceeds Accounts: Account in the name of ProjectCo but controlled by the Trustee under the Blocked
Account Agreement and holding any releases from the Funding Account and all payment from the
Province and any other revenues received by ProjectCo. Following substantial completion, funds in the
Proceeds Accounts shall be distributed in accordance with the trust indenture waterfall provisions as
follows: (1) transaction and administrative expenses; (2) ProjectCo costs and payments under the
Cause of
Termination Senior Debt Equity Other Adjustments
- principal plus: staff termination costs, contractor breakage costs, etc.
- accrued interest less: bank balances, insurance proceeds and the market
- make w hole value of ProjectCo's net assets (if any).
- make w hole
- principal plus: staff termination costs and contractor breakage costs.
- accrued interest and any other amounts ow ed by the Province
- makew hole less: any BC Hydro set-offs.
** Two or more capable bidders.
* Damage to the facility in excess $5 million not covered by insurance and resulting in breach of ProjectCo's financial covenants; insufficient insurance upon complete or substantial
destruction, uncollectible insurance receivables, risks becoming uninsurable, termination for Relief Event or Force M ajeure. Resulting termination payment shall be at least equal to
senior debt plus staff termination costs and contractor losses.
Province Default
or
Convenience
ProjectCo Default
If liquid market** and the Crow n opts to re-tender: highest compliant bid price less re-tendering costs and set-offs.
Otherw ise: PV of all payments to be received from the Province during the term of the PA net of all costs necessary to complete the
facility and provide all services during the operating phase or replace the service provicer, and net of contingency for potential cost
overruns, costs to rectify the w orks or restore services .
No-Fault
Termination *
- amount w hich w hen added to all prior
dividends that provides an internal rate
of return equal to the f inancial model
equity IRR or Fair Market Value of the
then issued outstanding amounts
under Junior Debt
- capital net of distributions up to
termination
17 Public Finance: Infrastructure
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Services Contract; (3) senior debt servicing; (4) any required reserve top-up (e.g,. DSRA); (5) payments
under the Project Parties Finance Services Agreement and the Project Parties Management Services
Agreement; (6) ProjectCo overhead; and, if the Restricted Payment Conditions have been satisfied, (7) any
scheduled payments on subordinated debt, the Service Commencement Management Fee and dividends to
equity sponsors. If the Restricted Payment Conditions are not satisfied, the remaining funds will be paid to
the Equity Lock-Up Account and shall be available to cover any shortfalls in the waterfall.
Senior Debt Service Reserve Account: Account in the name of ProjectCo but controlled by the Trustee
under the Blocked Account Agreement and funded at service commencement in an amount sufficient to
cover six months of scheduled senior debt servicing (principal and interest).
Additional Senior Indebtedness: Permitted subject to Senior Noteholders’ consent.
Restricted Payment Conditions: Dividends, subordinated debt servicing and other restricted payments are
permitted only if, among other things, no Default or Event of Default has occurred and is continuing, Service
Commencement has been achieved, the first principal repayment on the Senior Notes has occurred, the 12-
month historical and projected senior DSCRs are at least 1.15 times, and all reserves are fully funded as
required.
Key Negative Covenants: (1) No modification of material project agreements without consent of the
Trustee; (2) no new Encumbrances, other than Permitted Encumbrances; (3) no new debt except for
Permitted Indebtedness; (4) limitations on asset sales; (5) no new business without consent of the Trustee;
(6) no equity distribution if the relevant test is failed; (7) no amalgamation, merger or reorganization; and
(8) no accounts other than the Project Accounts.
Key Events of Default (grace period)
Failure to pay principal, interest or any other amount when due (three business days if not related to the
Senior Notes).
Failure to comply with any other (non-payment-related) covenant under the financing documents (15
business days or a longer period acceptable to the Senior Noteholders).
Abandonment of the project during construction for two continuous weeks except if caused by a
supervening event (nil).
Termination of any Financing Document unless, if related to the design-build guarantor or service
guarantor, the party causing the termination is replaced.
Termination of any major project agreement other than the PA (including the DB Agreement and the
Services Contract) unless it is replaced by a contract with a contractor acceptable to the Senior Noteholders.
Unremedied Event of Default under the PA or notice to terminate the PA from Province/nil.
Historical or projected senior DSCR below 1.0 time (nil).
Insolvency of ProjectCo, the DB Contractor or its guarantor, the Service Provider or its guarantor. However,
it will not be an Event of Default if in the event of the insolvency of the DB Contractor or its guarantor,
ProjectCo develops and implements a remedial plan acceptable to the Senior Noteholders within the
permitted timeframe. In addition, it will not be an Event of Default if, in the event of the insolvency of the
Service Provider or its guarantor, ProjectCo replaces the Service Provider with a contractor acceptable to
the Senior Noteholders and there is no interruption to the delivery of services.
Service Commencement not achieved by the Creditors’ Longstop Date, which is three months before the
Longstop Date under the PA (nil).
Any party defaults in its obligation under a major project agreement and the default is likely to have a
Material Adverse Effect on the project, unless such major project agreement (other than the PA) is replaced
within the permitted time period by a contract with a contractor and on such terms as are acceptable to the
Senior Noteholders.
18 Public Finance: Infrastructure
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Report Date:
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Rating
Debt Rating Rating Action Trend
Series A Senior Notes A (low) Provisional Rating – Finalized Stable
Related Research
Rating Public-Private Partnerships, February 28, 2014.
Note:
All figures are in Canadian dollars unless otherwise noted.
Copyright © 2014, DBRS Limited, DBRS, Inc. and DBRS Ratings Limited (collectively, DBRS). All rights reserved. The
information upon which DBRS ratings and reports are based is obtained by DBRS from sources DBRS believes to be accurate
and reliable. DBRS does not audit the information it receives in connection with the rating process, and it does not and cannot
independently verify that information in every instance. The extent of any factual investigation or independent verification
depends on facts and circumstances. DBRS ratings, reports and any other information provided by DBRS are provided “as is”
and without representation or warranty of any kind. DBRS hereby disclaims any representation or warranty, express or implied,
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