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 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 undertaken in F2017 are expected to continue to pressure credit metrics in the near term.

For the fiscal year ending August 31, 2017 (F2017), traffic grew by 5.1% (including leap-year adjustments). After several years of better than expected performance led to a large surplus in the rate stabilization account (RSA), the Company reduced base rates by 7.8% on average during F2017, which, coupled with a one-time customer refund of $60 million, caused a decline in revenues and EBITDA and compressed the debt service coverage ratio (DSCR) to 1.0 times (x).

The first nine months of F2018, ending May 31, 2018 (Q3 F2018), indicate continued traffic growth and stable operating conditions. Traffic volumes increased by 5.0% on a year-over-year (YOY) basis during year-to-date (YTD) Q3 F2018, exceeding NAV’s F2018 budget of 4.2%, which drove a revenue increase of 4.3% YOY, although EBITDA remained flat primarily due to the base rate reductions undertaken in F2017. Consequently, the DSCR for the trailing 12 months (TTM) ended May 31, 2018, improved only slightly, to 1.1x. During F2018, rates remained unchanged on average from F2017, as the reversal of the temporary rate reduction of 3.9% undertaken in F2017 was offset by the 3.5% base rate reduction and 0.4% temporary rate reduction undertaken during F2018. During F2018, NAV refinanced a portion of the $350 million Series MTN 2013-1 General Obligation Notes through the issuance of the $275 million Series 2018-1 MTN General Obligation Notes and total debt declined to $1.5 billion. The RSA balance of $122 million as at Q3 F2018 remained above the F2018 target balance of $104 million.

On a full-year basis, the Company anticipates traffic growth of 4.7% and 4.0% for F2018 and F2019, respectively. DBRS views this as reasonable given the YTD traffic trends exhibited by NAV and other major Canadian airports. NAV expects to keep rates unchanged in F2019 by reducing base rates by 0.4% to offset the temporary rate reduction of 0.4% planned in F2018. Despite supportive traffic levels, the base rate reductions undertaken in F2017 and an increase in salaries expense during F2018 are expected to lead to lower EBITDA and debt service coverage than in prior years, with the Company forecasting a DSCR of 1.7x for F2018. DBRS expects the Company’s DSCR to gradually increase to a comfortable level of around 2.0x in the medium term, in the absence of any further material rate reductions or declines in air traffic. NAV does not plan to raise new long-term debt over the medium term and is expected to comfortably meet its General Obligation Indenture (GOI) cash liquidity and rate covenants under its trust indentures.

While NAV’s mandate is 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 air traffic volumes weaken significantly or should the DSCR fall materially short of projections in the near to medium term. DBRS views positive rating action to be unlikely at present.

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 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.

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