DBRS Confirms MIFFC at A (low), Changes Trend to Negative

DBRS has today confirmed the A (low) rating on the Amortizing Bonds (the Bonds) of Montreal International Fuel Facilities Corporation (MIFFC or the Company) but concurrently revised the trend on the rating to Negative from Stable. The trend change incorporates MIFFC’s plan to continue to intentionally manage to a debt service coverage ratio (DSCR) of 1.0 times. Despite the Company’s proficient management, DBRS feels the lowered financial flexibility is inappropriate for the rating category given the volatile nature of the airline industry. If by the time of the next rating review MIFFC has not incorporated flexibility into its credit metrics by adjusting its rate-setting practices, further rating action will likely result.

Both member and itinerant volumes increased in 2011, well above the 1.1% decline which had been budgeted and reflective of a 6.9% increase in aircraft movements at Trudeau International Airport (Trudeau) and Mirabel International Airport (Mirabel). During 2011, Purolator and Qatar Airways joined the consortium, and no members departed, bringing the number of members to 25. The higher fuel volumes and member deposits drove revenue growth of 8.9%, while expenses grew at a slower pace, leading to an EBITDA increase of 9.1% to $5.2 million. The Company’s budget indicates that it expects a 5.6% growth in fuel deliveries for 2012, led by itinerant growth expectations of 18%, the majority of which is related to development activities at Mirabel. DBRS views this growth assumption as somewhat optimistic, particularly for itinerants, as 2012 year-to-date non-member volumes are essentially in line with those of the same period for 2011. Skyregional joined the consortium in June 2012, and its $200,000 non-refundable deposit provides modest revenue relief, although MIFFC has advised that EBITDA will be roughly in line with its original projections.

At the time of the last rating update, DBRS cited its concern with respect to the low DSCR of 0.99 times achieved in 2010 and noted that while it is not an event of default under the trust indenture, managing to a 1.0 times DSCR was considered aggressive. The DSCR demonstrated improvement to 1.09 times in 2011, although this still fell short of expectations of approximately 1.2 times, which DBRS considers appropriate for the rating category. DBRS envisions that the Company’s rate-setting practices will continue to constrain the DSCR to at best 1.1 times in 2012, which is deemed to be low for the rating category, particularly given the creditworthiness of airlines and relatively fragile state of the global economy.

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

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