DBRS Confirms Ratings on Strait Crossing Development Inc. at BBB (low), Stable

DBRS Limited (DBRS) confirmed Strait Crossing Development Inc.’s (SCDI or the Company) Issuer Rating (initially assigned on November 15, 2018) as well as the rating on its 6.17% Revenue Bonds at BBB (low). All trends are Stable.

The confirmation is primarily based on improved traffic fundamentals, continued good expense management, ongoing debt reduction and improved financial metrics, but tempered by the reduction in the General Revenue Account (GRA) of $15.3 million after meeting certain conditions under the Master Trust Indenture (MTI). DBRS views the reduction as supportable at the current rating, provided that financial metrics remain close to present levels. Assuming these conditions continue to be met, SCDI intends to remove funds from the GRA at upcoming Restricted Payment dates.

Traffic continues on a rising trajectory with a volume of 865,738 vehicles in 2017 that surpassed budget by 9.3% and increased year over year (YOY) by 3.3%. As per Statistics Canada, Prince Edward Island’s (rated A (low) with a Positive trend by DBRS) gross domestic product increased by 3.4% in 2017, the highest growth among Atlantic provinces. A modest $0.50 toll increase for two-axle vehicles and good cost management continue to support revenues and EBITDA, which rose 4.4% YOY compared with 2016. Tightly controlled expenditures, combined with revenue growth, resulted in a debt service coverage ratio (DSCR), as calculated by DBRS, of 1.39 times (x) for F2017 compared with 1.35x for 2016. For F2017, SCDI reported a DSCR, as defined in the MTI, of 1.33x, which is an improvement over the F2016 DSCR of 1.24x. The year-to-date (as of September 30, 2018) traffic at the bridge continued to outperform with a volume of 694,701 vehicles, which exceeded budget by 0.61% and surpassed the prior-year volumes by 0.7%. Corresponding toll revenues were 0.3% ahead of budget and 1.7% higher than the prior-year period. For the period ending September 30, 2018, debt fell to $244.6 million and SCDI reported a DSCR of 1.34x.

DBRS expects that, barring any unforeseen material changes to current economic conditions, SCDI should continue to report stable or improving traffic and financial metrics that are consistent with the current ratings. Over time, if sustainable DSCRs exceeding 1.5x are achieved, there could be a positive rating action. While currently viewed as being of low probability, the following factors could lead to a negative change in the credit rating: significant decline in traffic or change in traffic mix such that revenues fall materially; incurrence of large unexpected maintenance or rehabilitation items; and DSCR, as calculated by DBRS, deteriorating to 1.10x or lower. DBRS also notes that, if the GRA balance declined significantly, any potential rating upside associated with improving financial performance could be pushed further into the future. Absent financial performance improvement, a materially lower GRA balance could put negative pressure on the rating.

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

The principal methodology is Rating Public-Private Partnerships, 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.