DBRS Confirms NAV CANADA at AA, AA (low), Stable Trends

DBRS has confirmed the ratings on the Senior Debt and General Obligation Debt of NAV CANADA (the Company) at AA and AA (low), respectively. The trend remains Stable. The rating confirmation incorporates the sound traffic growth experienced during the current fiscal year which has led to an upturn in operating results, but remains tempered by the potential volatility inherent in the air travel industry and the uncertain economic climate set against the backdrop of sovereign debt concerns.

For fiscal year 2010 (F2010), traffic declined 0.8%, somewhat more than the Company had expected, and drove a corresponding decrease in revenues (excluding rate stabilization and one-time items) of 0.8%. However, operating expenses before rate stabilization and one-time items fell by 1.3%, leading to an increase in EBITDA of 1.4% to $221 million. Modestly higher net interest charges led to a decrease in the debt service coverage ratio (DSCR) to 1.6 times.

For the first nine months of fiscal year 2011 (F2011), traffic was up 4.9% as compared to the same period in F2010, reflective of an upturn in fortunes of air carriers and the Eyjafjallajökull volcano eruptions that negatively impacted trans-Atlantic air travel during the month of April 2010. To the end of July 2011, traffic was up 4.6% as compared to the first 11 months of F2010, and it seems likely that the Company will meet its projection of a 4.4% traffic increase for F2011.

NAV CANADA estimates that the DSCR for F2011 will be roughly 1.8 times, providing support to the credit.

The Company expects 2.6% traffic growth in F2012. Given the uncertain economic climate and volatility caused by sovereign debt concerns, this could prove to be somewhat optimistic, and DBRS expects that growth may well be modest. NAV CANADA’s base case traffic forecast would lead to a DSCR of approximately 1.9 times, although DBRS estimates that flat traffic levels for 2012 would give rise to a DSCR of roughly 1.7 times. Going forward, the absence of material capital expenditures should help to curtail growth of debt and lend support to financial metrics, although pension funding pressures may reappear as current going concern and solvency surpluses could reverse over time.

NAV CANADA will adopt IFRS accounting standards for F2013. An IFRS transition project has been ongoing for a number of years and many of the tasks required to migrate to IFRS have already been completed. In its current form, IFRS does not allow for the use of rate-regulated accounting, which is expected to add volatility to the Company’s bottom line, although DBRS’s calculations of NAV CANADA’s financial metrics currently exclude adjustments arising from transfers to and from the rate stabilization account, and the DSCR will not be impacted by IFRS adoption.

Note:
All figures are in Canadian dollars unless otherwise noted.

The applicable methodology is Rating Canadian Airport Authorities, which can be found on our website under Methodologies.