DBRS Confirms 407 East Development Group at BBB (high), Stable

DBRS Limited (DBRS) confirmed the rating of BBB (high) on the Long-Term Senior Bonds (the Long-Term Bonds) of 407 East Development Group General Partnership (ProjectCo or 407 East Development Group). The Trend remains Stable. ProjectCo is the special-purpose entity created to design, build, finance, maintain and perform lifecycle obligations of the Highway 407 east extension (the Extension or the Project) under a 33.6-year project agreement (PA) with the Province of Ontario (the Province; rated AA (low) with a Stable trend by DBRS). The rating continues to be supported by the availability-based revenues from the Province; the pass-down of all service-period obligations, including lifecycle risk, to an experienced service provider; and the fact that there have been no payment deductions since substantial completion.

All of ProjectCo’s construction works were passed down under a date-certain, fixed-price contract to the general partnership (GP) of subsidiaries of SNC-Lavalin Group Inc. (rated BBB with a Stable trend by DBRS) and Ferrovial Agroman S.A. (collectively, the Construction Contractor). During construction, the Construction Contractor executed 46 variations, with a total value of approximately $25.3 million. In addition, two Tolling Civil Infrastructure-related variations were executed with funds that had been set aside by the Province at financial close as allowances, totaling approximately $39.2 million.

Final completion has yet to be achieved. According to the Construction Contractor, to date, a total of 10 minor deficiencies remain outstanding, with a total value of $1 million. The senior creditors’ technical advisor (SCTA), LeighFisher Canada Inc., issued its 2017 OM&R monitoring report on May 18, 2018, and reported that the Construction Contractor is continuing to work towards final completion and most deficiencies from the construction phase have been addressed. The only significant item that remains outstanding is the demolition of the Lake Ridge bridge. The demolition works are not considered to be onerous and relevant works are being carried out in small portions to avoid potential interruption with CN Rail’s operations. It is currently expected that the demolition of the Lake Ridge bridge will be completed by the end of spring and final completion will be achieved by summer of 2018.

All risks and responsibilities pertaining to routine and lifecycle maintenance during the service phase are passed down to a general partnership (the Service Provider), indirectly owned by SNC-Lavalin Group Inc. and Cintra Infraestructuras, S.A. The scope of services required under the PA is standard and includes preventive and lifecycle maintenance of the highway and coordination of emergency services. Parent guarantees of 250% of the average annual operation, maintenance and repair (OM&R) payment (indexed) upon termination, with liquid security provided by a letter of credit of 300% of the average annual OM&R payment (indexed), will back the Service Provider’s obligations. DBRS notes that the letter of credit may be reduced to 50% of the average annual OM&R payment (indexed) in the event that certain ratings triggers are met, still supportive of the rating for the Project during the service phase.

The SCTA confirmed that the scope or the budget of OM&R services that ProjectCo is responsible for under the PA has not changed as a result of the variations during construction. To date, ProjectCo has not incurred any payment deduction for availability or quality failures or a failure to close out any minor deficiencies within the required time frames. Key financial metrics, such as the DSCR, are in line with expectations at financial close.

As mentioned at the time of the last rating upgrade, DBRS notes that if final completion is achieved, there are minimal ongoing payment deductions and there are no material changes to the OM&R budgets, a positive rating action is possible. As such, dependent upon the achievement of final completion, DBRS expects to revisit the rating prior to its next annual review cycle. However, DBRS notes that ProjectCo’s relatively limited resilience to shocks in the lifecycle budget during operation is expected to constrain the rating to a maximum of A (low).

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

The principal methodologies are Rating Canadian Airport Authorities and DBRS Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers, 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.

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