DBRS Confirms NAV CANADA at AA/AA (low), Stable Trend

DBRS Limited (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 good traffic growth experienced during the last several months, but the rating remains tempered by the potential volatility inherent in the air travel industry and the magnitude of NAV CANADA’s pension obligations.

For fiscal year ending August 31, 2014 (F2014), air traffic volumes demonstrated steady month-on-month growth throughout the year and increased by 3.5%, driving 3.3% revenue growth. Operating expenses also increased but to a greater degree, leading to a decrease in EBITDA of 2.1% (before rate stabilization) to $229 million and a modest decrease in the debt service coverage ratio (DSCR) to 1.8 times.

For the first six months of fiscal year 2015 (F2015), traffic increased by 4.7% as compared with the same period in F2014, reflective of an upturn in fortunes of air carriers and a recovering U.S. economy. For the same period, EBITDA increased by roughly 6.0%, buoyed by higher revenues for all business segments but partially offset by higher compensation levels, overtime costs and a planned increase in pension expense. The Company has revised its traffic estimates for F2015 upward to 4.1% and expects that this will lead to a DSCR of 1.9 times for the current fiscal year. As the rate stabilization account is at its target balance, no rate increases are planned at this time.

As at February 28, 2015, NAV CANADA had invested a total of USD 120 million in Aireon LLC (Aireon) and anticipates further investments of USD 30 million by the end of 2017. The Company also remains focused on cost control, and DBRS expects that it will continue to proactively manage its expenses. Notwithstanding, further cost savings could be modest given that majority of the Company’s expenses are fixed.

At January 2014, NAV CANADA’s pension plan had a going concern deficit of $242 million and a statutory solvency deficiency of $605 million. These numbers reflect the adoption of updated mortality assumptions. The Company is required to fund its statutory solvency deficiency over the next five years, and as of February 28, 2015, NAV CANADA had posted letters of credit totalling $334 million. 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.

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.