DBRS Confirms Ratings of NAV Canada

DBRS has today confirmed the Issuer Rating and the ratings on the Senior Debt and General Obligation Debt of NAV CANADA (the Company) at AA, AA and AA (low), respectively. The trend remains Stable. The rating confirmation incorporates the essential nature of the services provided by the Company and the financial results it achieved last fiscal year, but reflects relatively soft traffic levels and the magnitude of NAV CANADA’s pension obligations.

For fiscal year 2013 ending August 31 (F2013), air traffic declined by 0.5%, although excluding leap-year effects, the decline was 0.2%, with traffic growth resuming during the third fiscal quarter. The decline in traffic contributed to a slight drop in service charges revenue although increases in other revenues led to 0.4% overall revenue growth. The rate of revenue growth was slightly outpaced by operating expenses, causing a modest decrease in EBITDA (before rate stabilization). However, as a result of slightly lower net interest expenses, the debt service coverage ratio (DSCR) increased by five basis points to 1.9 times, in line with NAV CANADA’s expectations for the fiscal year. As the rate stabilization account is at its target balance, the Company does not anticipate implementing a rate increase at this time.

As expected, the Company made its second investment in Aireon LLC (Aireon) during F2013. Once fully operational, Aireon will provide space-based air traffic surveillance services to air navigation service providers (including NAV CANADA) around the globe that will allow airlines to save fuel through route optimization, including making use of more favourable altitudes than is currently permissible using existing land-based air navigation equipment. The Company has now invested USD 55 million and anticipates further investments of USD 95 million by the end of 2017.

For the first three months of F2014, traffic was 2.5% higher than for the same period in F2013, although the Company notes that a portion of the increase is attributable to the reduced air travel that took place as a result of Hurricane Sandy, which closed major airports along the eastern seaboard for three days in October 2012. The Company expects traffic growth of 2.4% for F2014, which would lead to a stable DSCR. Given the continuing uncertainty of the global economic climate and relatively tepid growth, achieving this level of growth could prove challenging.

At January 2013, NAV CANADA’s pension plan was in a going concern surplus of $188 million, although the Company’s pension plan solvency deficit was $772 million, primarily as a result of a lower discount rate and the requirement to use the market value of assets, rather than the smoothed value of assets, for the solvency valuation process. As per pension legislation, the Company is required to fund its statutory solvency deficiency over the next five years, and the Company posted an additional letter of credit of $126 million in July 2013. The Company is estimating a continued deficit position on a solvency basis for the next several years and expects to continue to post letters of credit to meet its statutory solvency deficiency funding obligations. Effective January 2014, all new employees joining the Canadian Air Traffic Control Association, Air Traffic Specialists Association of Canada, Unifor 1016, Canadian Federal Pilots Association or Association of Canadian Financial Officers unions will be required to join “part B” of the Company pension plan, which does not feature automatic Consumer Price Index indexation of benefits. This development should provide NAV CANADA with a measure of pension relief over the longer term.

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 Canadian Airport Authorities, which can be found on our website under Methodologies.

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