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

DBRS Limited (DBRS) has today confirmed the Issuer Rating and the Senior Debt rating of NAV CANADA (NAV or the Company) at AA as well as its General Obligation Debt rating at AA (low). All trends remain Stable. The credit profile is supported by a solid operating framework, sound traffic conditions and declining debt; however, pension deficiencies remain large while heavy user-fee reductions are expected to push the debt service coverage ratio (DSCR) down to a level that DBRS views as inconsistent with the rating, albeit only for one year.

The Company posted a sound performance in F2015 with 4.6% traffic growth driving 3.1% year-over-year improvement in EBITDA as calculated by DBRS. No new borrowing took place during that year; therefore, debt receded on the continued amortization of the series 97-2 bonds while the strong EBITDA boosted the DSCR to nearly 2.0 times (x). Interim results point to the continuation of good operating conditions in F2016. NAV had budgeted for 2.0% traffic growth, but volumes were up 3.6% in the first nine months of the fiscal year. Expenditures, on the other hand, are down slightly because of lower pension expenses, resulting in 33% growth in EBITDA over the same prior-year period. Cash surplus was used to repay a large portion of series MTN 2006-1 that matured in February 2016, but the bank facility was tapped at $40 million as a result of hedge settlement payments. This led to a net-debt reduction of 9.9% to $1,758 million at May 31, 2016, the lowest level since DBRS’s coverage was initiated. The continuation of strong cash flows should allow for the repayment of the bank loan before fiscal year-end, driving further improvement in debt and the DSCR, which is projected to exceed 2.2x this fiscal year.

The Company anticipates traffic to grow by 2.5% in the next fiscal year, which DBRS views as reasonable. Normally, this would be conducive to sound results, but sizable fee reductions planned for September 1, 2016, are projected to dampen revenue significantly and cut EBITDA as calculated by DBRS by 40% in F2017. While NAV has no new long-term debt needs for the foreseeable future, the fee-setting strategy is expected to compress the DSCR to the 1.3x to 1.4x range, which DBRS views as inconsistent with the rating. Barring an industry downturn, EBITDA is likely to rebound markedly in the following year as a portion of the rate cut is for one year only, allowing the ratio to return to historical levels. As such, while the current outlook is manageable for the credit, the maintenance of an unduly low DSCR for an extended period of time caused by rate reductions could have an adverse impact on the ratings.

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.

The rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.

The full report providing additional analytical detail is available by clicking on the link under Related Research at the right of the screen or by contacting us at info@dbrs.com.

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