DBRS Confirms the Ratings of the Guaranteed Senior Bonds Issued by Muskrat Falls/Labrador Transmission Assets Funding Trust and Labrador-Island Link Funding Trust at AAA, Stable Trend

DBRS Limited (DBRS) confirmed its AAA ratings with Stable trends on the 2013 and 2017 Guaranteed Senior Bonds (collectively known as the Bonds), totalling $7.9 billion, issued by the Muskrat Falls/Labrador Transmission Assets Funding Trust and Labrador-Island Link Funding Trust (collectively known as the Issuers). The rating is predicated on two unconditional and irrevocable federal loan guarantees: the 2013 federal loan guarantee and the 2017 federal loan guarantee (together known as the Guarantee) of substantially similar nature, provided by the Government of Canada (Canada or the Guarantor). This rating action follows DBRS’s October 13, 2017, confirmation of Canada’s sovereign rating at AAA with a Stable trend.

DBRS notes that the Guarantee has met its criteria for a flow-through of Canada’s sovereign rating to the Bonds. The Guarantee constitutes an irrevocable, unconditional, absolute and continuing obligation of Canada. There is no requirement to exhaust recourse against the Issuers before bondholders are entitled to the payment from Canada; all defences are waived by the government and subrogation rights are postponed as long as the guaranteed obligations are still outstanding; and no amendment of the Guarantee is permitted, except by agreement with the Indenture Trustee. Furthermore, release of the Guarantor is permitted only when all of its obligations are fully repaid. Any rating upgrade or downgrade is expected to follow DBRS’s similar rating action on Canada.

The Issuers were created as single-purpose financing trusts to facilitate the financing of the Muskrat Falls Project (the Project), an 824-megawatt hydroelectric power generating facility and the associated transmission lines being developed in Newfoundland and Labrador. The Issuers’ sole business is to issue the Bonds and on-lend proceeds to the Project via back-to-back loans. The Issuers sized the Bonds to cover interest payment during construction. After in-service date, debt service will depend on principal and interest received on the back-to-back loans to the Project. In June 2017, Nalcor Energy, the Project sponsor, announced that the estimated in-service cost (including financing costs) would increase to $12.7 billion from the $11.4 billion announced in June 2016. First power and full power are now expected in Q4 2019 and Q3 2020, respectively. Notwithstanding the foregoing, DBRS expects that the Bonds’ rating will continue to move in tandem with Canada’s sovereign rating, irrespective of the Project’s performance.

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

The principal methodologies are Rating Project Finance and DBRS Criteria: Guarantees and Other Forms of Support, which can be found on dbrs.com under Methodologies.

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 under Related Documents or by contacting us at info@dbrs.com.

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

DBRS will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving this report, contact us at info@dbrs.com