DBRS Confirms Strait Crossing Development Inc. at BBB (low)

DBRS has today confirmed the rating on Strait Crossing Development Inc.’s (SCDI or the Company) 6.17% Revenue Bonds at BBB (low) with a Stable trend. As expected in last year’s review, the traffic recovery is unfolding at a slow and uneven pace, as volume growth of 1% recorded in 2012 was followed by a decline of 1.0% during the first nine months of 2013, relative to the same period a year ago. Toll increases continue to provide support to revenue and, combined with mild winter conditions and tight expenditure management, helped deliver a two basis point improvement in the DSCR, as calculated by DBRS in 2012, to 1.17 times (x).

While at its highest level in five years, the DSCR remains lean and susceptible to traffic volatility, given the limited fee setting autonomy of Confederation Bridge (the Bridge). Despite higher tolls for cars and trucks of $0.25 implemented on January 1, 2013, revenues were down 0.8% year over year for the first nine months of 2013, whereas operating expenses were up notably, owing mainly to the return of winter maintenance expenses to more normal levels. As such, if traffic fails to rebound notably during the remainder of the year, DBRS estimates that EBITDA could fall by 2% to 3% in 2013, which, combined with the accretive amortization of the bonds, could erase the improvement recorded in the DSCR over the last two years.

The performance of the Bridge’s structure continues to exceed expectations, which helps keep capital expenditures low. Furthermore, debt maintains a downward trend, standing at $285.0 million at September 30, 2013, down 2.0% from a year ago, while the 12-month debt service reserve account and the General Revenue Account (GRA) continue to hold sufficient resources to cover nearly two years of debt servicing.

Looking forward, DBRS continues to expect modest population growth and slowly improving economic conditions across the Atlantic region, as well as in Ontario and Québec (key sources of tourism for the island), to be conducive of traffic growth roughly in line with the Company’s expectations of 1.25% for cars and 1.0% for trucks. However, weather conditions, tourism and potato harvests will maintain an element of traffic volatility year over year. Toll increases remain constrained to 75% of the national CPI under the concession with the federal government, which is likely to translate into effective increases of 1% to 2% per year over the medium term. Expenditures are expected to continue to track inflation, limiting EBITDA growth to 1% to 2% per year, a pace insufficient to drive rapid improvement in the DSCR.

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.

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

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