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

DBRS Limited (DBRS) 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, strong traffic conditions and declining debt; however, pension deficiencies remain large, and significant user-fee reductions are expected to push the debt service coverage ratio (DSCR) down to a level inconsistent with the rating, albeit only for one year.

The Company posted a strong performance for the fiscal year ending August 31, 2016 (F2016), with traffic growth of 4.1% coupled with operating efficiencies driving a 10.4% year-over-year growth in EBITDA, as calculated by DBRS. Debt reduced markedly by 12%, as the Company redeemed $200 million in net debt under its General Obligation Indenture (GOI) by refinancing $250 million of the $450 million debt due in F2016. Strong EBITDA coupled with lower interest cost led to a DSCR of 2.6 times (x) in F2016. Interim results for the first nine months of F2017 indicate continued traffic growth and sound operating conditions. Including leap year adjustments, traffic growth was 5.1% during the nine months ending May 31, 2017, against NAV’s F2017 budget of 1.1%. However, the traffic growth supported only muted revenue and EBITDA growth, as NAV cut its base rates by 7.8% on average during F2017.

On a full-year basis, the Company anticipates traffic growth of 5.4% and 3.8% in F2017 and F2018, respectively. DBRS views this as reasonable considering the continuing positive trend in air traffic volumes observed across major Canadian airports. While the operating conditions remain comfortable, the Company’s significant rate reductions in F2017 and F2018 are expected to negatively affect EBITDA. Although NAV does not plan to raise new long-term debt over the medium term, its rate setting strategy is expected to compress the DSCR to 0.9x for F2017 and 1.7x for F2018. This is somewhat offset by the strength of NAV’s operating model and strong liquidity position supported by a cash balance of $218 million as at May 31, 2017, and access to unutilized credit lines. Notwithstanding, NAV will still meet its GOI cash liquidity and rate covenants under its trust indentures. Over the last year, the Company’s liquidity position was boosted by $293 million of maturing asset-backed commercial paper (ABCP). Part of the ABCP proceeds were used to redeem $100 million of the series MTN 2009-1 debt under the GOI. This led to a further reduction in total debt to $1.6 billion, which is the lowest level since DBRS’s coverage was initiated. Furthermore, DBRS notes that the decline in EBITDA and, in turn, DSCR levels, is largely attributable to rate reductions undertaken by NAV, which were as a result of several years of strong performance and a large surplus in the rate stabilization account. At the end of the interim period Q3 2017, the balance of the rate stabilization account was $177 million, higher than the target balance of $101 million.

DBRS views positive rating action to be unlikely at present. While DBRS understands NAV’s mandate to break even on an operating basis, DBRS nonetheless expects it to maintain a financial cushion in respect to its ratepayers. As such, negative rating action could result should the DSCR fall materially short of the 1.7x predicted by the Company by the end of F2018.

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 principal methodology is Rating Canadian Airport Authorities, which can be found on dbrs.com 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.