DBRS Assigns Rating of AA (low) with a Stable Trend to New Issue of NAV CANADA

DBRS Limited (DBRS) assigned a rating of AA (low) with a Stable trend to the $275 million Series 2018-1 MTN General Obligation Notes issued by NAV CANADA (NAV or the Company). The debt will have a 30-year bullet maturity, pay a fixed-rate interest of 3.293% and will rank pari passu with all other subordinated obligations of the Company. It is DBRS’s understanding that the net proceeds from the issue will be used to repay a portion of the Series MTN 2013-1 General Obligation Notes that mature on April 19, 2018. The rating is consistent with the ratings previously assigned by DBRS to the Company’s outstanding General Obligation Debt. The Company’s credit profile is supported by a solid operating framework, strong traffic conditions and declining debt, although pension deficiencies remain large and significant user-fee reductions have compressed the debt service coverage ratio (DSCR) in the near term. DBRS notes that the recent rate reductions undertaken by NAV are after several years of strong performance, which led to a large surplus in the rate stabilization account. The rate reductions led to a compression in the DSCR to 1.0 times (x) in F2017, which was somewhat offset by the strength of NAV’s operating model and liquidity position, which included cash balances of $222 million as at F2017 and access to $385 million in unutilized credit lines.

Since DBRS last confirmed the Company’s ratings on September 13, 2017, NAV has posted a strong performance for the fiscal year ending August 31, 2017 (F2017), with traffic growth of 5.1% (including leap-year adjustments). Favourable operating conditions contributed to the Company significantly reducing its base rates by 7.8%, on average, during F2017, which in turn resulted in a decline in revenues and EBITDA. NAV used a portion of its $293 million of maturing asset-backed commercial paper to redeem $100 million of the Series MTN 2009-1 debt under the General Obligation Indenture (GOI). This led to a reduction in total debt to $1.6 billion as at F2017, which is the lowest level since DBRS’s rating coverage was initiated.

Interim results for the first three months of F2018 ended November 30, 2017, point to continued traffic growth and sound operating conditions. Traffic growth was 5.6% during this period compared with NAV’s F2018 budget of 4.2%. On a full-year basis, the Company anticipates traffic growth of 4.9% for F2018. DBRS views this as reasonable considering the continuing positive trend in air traffic volumes observed both globally and among major Canadian airports. During F2018, rates are expected to remain unchanged, on average, from F2017, as the 3.5% base rate reduction and 0.4% temporary rate reduction planned for F2018 will be offset by the reversal of the temporary rate reduction of 3.9% undertaken in F2017. However, the significant base rate reductions undertaken in F2017 are expected to result in muted EBITDA growth during F2018, despite the expectation of solid traffic volumes. 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 1.7x for F2018, which is lower than historical levels, although an improvement over F2017. The DSCR for the trailing 12 months ended Q1 2018 was 1.1x. As at the end of the interim period (Q1 2018), the balance of the rate stabilization account was $128 million, higher than the target balance of $104 million for F2018. Furthermore, NAV is expected to comfortably meet its GOI cash liquidity and rate covenants under its trust indentures.

While DBRS understands that NAV’s mandate is to break even on an operating basis, DBRS nonetheless expects the Company to maintain a financial cushion in respect to its ratepayers. As such, a negative rating action could result should air traffic volumes weaken significantly, causing a material deterioration in the DSCR. At present, DBRS views a positive rating action as unlikely.

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

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.

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