DBRS Assigns “A” Rating to BC Ferries’ New Debt Issue

DBRS has today assigned a rating of “A” to the proposed Series 13-1 Senior Secured Bond issue of up to $200 million of British Columbia Ferry Services Inc. (BC Ferries or the Company). Maturing in October 2043, the bonds will rank pari passu with all other senior indebtedness of BC Ferries secured under the trust indenture. Proceeds from the debt issue will be used to partially fund capital expenditures, to repay amounts outstanding under its operating credit facility, to fund the debt service reserve account in connection with the new debentures and for general corporate purposes.

As expected, operating conditions have remained relatively soft since DBRS’s last rating confirmation on March 26, 2013. Following declines of 1.8% and 1.4% in 2012–13, vehicle and passenger traffic fell a further 1.2% and 1.0%, respectively, during the six months to September 30, 2013, relative to the same period the year before, keeping volumes at their lowest levels in more than a decade. DBRS notes, however, that a large part of the declines observed since the beginning of 2013–14 have been caused by non-recurring factors, such as the timing of the Easter holiday and unusually stormy weather in September, suggesting that underlying traffic fundamentals may finally be stabilizing after three consecutive years of declines. Price cap increases of 4.1% approved by the Commissioner and effective April 1, 2013, are expected to offset soft traffic and generate modest revenue growth while operating expenses are expected to remain tightly managed, in part with the help of improved fuel consumption and the $18.9 million in net savings expected from service-level adjustments to be agreed on with the Province by fiscal year-end. As such, EBITDA should be fairly stable, although slightly higher debt servicing owing to the prefunding conducted by the Company during the year may put modest pressure on the debt service coverage ratio as calculated by DBRS. Nonetheless, the ratio should remain above 2 times (x).

Total debt was little changed at June 30, 2013, at $1,333.2 million, but is expected to have fallen slightly since then as the Series 08-2 debentures were redeemed in July, five months before maturity, with $55 million in cash and an $88 million draw on the credit facility. However, debt will rebound somewhat as a result of the upcoming borrowing. Furthermore, the $1.1 billion capital program in place for the next five years may require up to $300 million in new debt. DBRS views the debt outlook as manageable for the credit profile, if traffic stabilizes and price cap increases remain adequate, but understands that significant capital needs lie beyond the current forecast horizon. This will require careful management going forward, as well as continued support from the Commissioner in order to prevent erosion in financial metrics and in BC Ferries’ borrowing capacity.

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

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