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

DBRS Limited (DBRS) has today confirmed the rating on Strait Crossing Development Inc.’s (SCDI or the Company) Revenue Bonds at BBB (low) with a Stable trend. Traffic continues to be volatile, with a volume decline of 0.8% recorded in 2013 followed by traffic growth of 0.5% during the first nine months of 2014 relative to the same period a year ago. Toll increases and tight expenditure management continue to provide modest support to revenue and EBIDTA, yet relatively low population and economic growth combined with gas price increases, unexceptional potato harvests and soft tourism caused an erosion in the Debt Service Coverage Ratio (DSCR) as calculated by DBRS to 1.13 times (x) in 2013.

The DSCR remains lean and susceptible to traffic volatility given the Company’s limited fee setting autonomy. Nonetheless, a toll increase for cars and trucks of $0.50 implemented on January 1, 2014, helped increase revenues by 1.7% for the first nine months of 2014. Despite the increase in winter maintenance costs, operating expenses remained at previous year levels, owing to various realized optimizations and savings from more efficient electronic systems being installed on the bridge. Should traffic continue to rebound during the remainder of the year, DBRS estimates that EBITDA could improve by 1% to 2% and help minimize the degradation of the DSCR in 2014. DBRS views a 12-month trailing DSCR of at least 1.10x as the threshold level for the rating, and if DBRS believes this level will be breached by SCDI, negative rating action will be likely.

The performance of the Confederation Bridge structure continues to exceed expectations, which has helped keep capital expenditures low. The Company has also been working within the project agreements with the Government of Canada to reduce the reserving period for long-term maintenance work from ten to six years. DBRS notes that this could provide some breathing room to the financials in the short term but might lead to more sudden degradation in the DSCR in future years if traffic growth remains sluggish. Debt maintains a downward trend and stood at $278.5 million at September 30, 2014, down 2.3% from a year ago, while the 12-month debt service reserve account and the general revenue account 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 to traffic growth roughly in line with the Company’s expectations of 0.75% for cars and trucks. However, weather conditions, gas prices, tourism, infrastructure projects and potato harvests will continue to contribute to traffic volatility. 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.