DBRS Rates New Issue of NAV CANADA at AA (low), Stable Trend

DBRS Limited (DBRS) has today assigned a rating of AA (low) with a Stable trend to the $250 million General Obligation Debt, Series MTN 2016-1 issue of NAV CANADA (the Company). The debt will have a 30-year bullet maturity, pay a fixed-rate interest of 3.534% and will rank pari passu with all other subordinated obligations of the Company. The rating is consistent with the ratings previously assigned by DBRS on the Company’s outstanding General Obligation Debt. The AA rating and Stable trend assigned to the Company’s Senior Debt is also unchanged. Net proceeds are expected to be used to repay a portion of the $450 million in subordinated debt maturing February 24, 2016 (Series MTN 2006-1).

Since DBRS last confirmed the Company’s ratings on June 2, 2015, the Company released its fiscal year results for 2015 and its Q1 2016 results. For F2015, traffic increased by 4.6%, leading to a F2015 revenue increase (before rate stabilization) of 4.7%. Operating expenses for the period increased at a slightly quicker pace of 5.1%, attributable to increases in compensation levels and higher overtime and fringe benefit costs, higher pension expenses, higher travel and relocation costs as well as slightly higher costs for facilities maintenance and technical services. For F2015, EBITDA before rate stabilization grew by 3.1%, leading to a debt service coverage ratio (DSCR) as calculated by DBRS of 1.93 times (x).

For Q1 2016, traffic growth continued and was up 3.6% versus Q1 F2015. The Company adopted International Financial Reporting Standards (IFRS) for the fiscal year commencing September 1, 2015. The adoption of IFRS has not greatly affected reported revenues, although this has led to greater delineation of expense-line items on its statement of operations. For the first quarter, revenues were up 5.2% as a result of higher traffic and increased revenue from technology service and development contracts as well as other miscellaneous revenue. As calculated by DBRS, operating expenses increased by 0.8% led by higher salaries, benefits and pension costs as well as modestly higher technical services and facilities maintenance costs, partially offset by a commodity tax refund. As a result, EBITDA for the quarter increased by $15 million to $81 million, giving rise to a trailing 12-month DSCR for Q1 2016 of 2.06x as calculated by DBRS.

In light of good traffic levels, the $124 million notional balance of its rate stabilization account (which exceeds the target balance of $100 million) and the extinguishment of its pension benefit asset, the Company is considering a rate reduction that could be potentially enacted in September 2016. DBRS expects that air traffic for 2016 will be flat to slightly higher, although recent economic unrest could manifest itself in lower traffic levels during the busy summer season. Should air traffic materially decline, DBRS expects that the Company would set its rates and charges to maintain a DSCR appropriate for its ratings.

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

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.

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