DBRS Confirms All Ratings of 407 International Inc.

DBRS has confirmed the ratings of 407 International Inc. (the Company or 407). All trends are Stable. Despite a heavy debt burden and traffic that exhibited only slow growth in 2012, the Company continues to exhibit sound operating efficiency, solid cash flow generation, sizable reserves and good long-term traffic prospects. After declining in 2011, vehicle kilometres travelled (VKT) in 2012 were up by 0.6% on an annual basis, while total trips were essentially flat, up 0.1% and average workday trips declined by 0.2%. Despite the relatively modest traffic growth, revenues grew by 8.7%, mainly as a result of toll increases but also reflective of fewer unbillable accounts. Expenses grew by a more modest amount, leading to EBITDA growth of 9.8%. Debt levels were up 7% over 2011 levels as the Company implemented its capital structure plan to gradually increase leverage over the next two to four years. However, this was largely offset by EBITDA growth and debt coverage metrics were improved on a year-over-year basis. The senior debt service coverage ratio (DSCR) including shadow amortization as per the master trust indenture amounted to 2.0 times, and cash-based junior DSCR of 2.4 times, in excess of the 1.7 times and 2.0 times targets agreed to with DBRS for the current rating levels. The Company was not required to make any congestion payments in 2012.

For the first half of 2013, VKTs declined by 0.3% as compared to the same period the year prior. The drop in traffic was principally a result of poorer weather conditions during the winter months compared to the previous year and one fewer day as a result of the 2012 leap year. Traffic for the year is expected to remain flat, although toll increases should largely offset the rate of expense growth, and EBITDA is expected to grow by roughly 6.6%. While leverage is expected to continue increasing, EBITDA growth should leave coverage metrics supportive of the rating.

The growth in leverage since the last rating report is in line with the Company’s intentions, as framed in its management discussion and analysis of 2012 Q2, to gradually increase debt by way of bullet bonds of staggered maturities, with longer-term preferences, while maintaining a cash-based senior and junior DSCR above 2.00 times and a senior DSCR, including shadow amortization as per its master trust indenture, above 1.70 times. The 407 also intends to keep minimum unrestricted cash balances of three months of budgeted cash annual operating expenses (excluding provision for doubtful accounts) and 3% of budgeted annual revenues on hand, which should help to ensure adequate liquidity. Cash balances in excess of such amounts would be paid as dividends, if permitted by the trust indenture. DBRS believes that the leverage intentions would not have a ratings impact upon the debt ratings, provided that the Company manages its dividend payouts and debt levels in accordance with the prevailing economic outlook and with its current operating conditions in mind. This seems especially important in the current environment of soft traffic conditions. In order to maintain current rating levels, DBRS expects that the Company would continue to possess an ability to absorb unexpected traffic or revenue downturns or unanticipated increases in financing costs without breaching targeted DSCR levels.

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

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

The applicable methodology is Rating Public-Private Partnerships, which can be found on our website under Methodologies.