DBRS Confirms Ratings of 407 International Inc.

DBRS Limited (DBRS) confirmed the Issuer Rating of 407 International Inc. (407 or the Company) at “A,” which was assigned on November 15, 2018. DBRS also confirmed the Company’s Senior Bonds rating at “A,” Junior Bonds rating at A (low) and Subordinated Bonds rating at BBB. All trends are Stable. The ratings are supported by the solid long-term economic fundamentals of the catchment area and 407’s sound cash flow generation and good operating efficiency, but are tempered by the Company’s sizable debt burden and leverage intentions.

After growing 2.6% in 2017, traffic growth continued in the first nine months of 2018 (9M 2018) with vehicle kilometres travelled up by 1.8%, reflective of a 1.0% increase in the number of trips and a 0.8% increase in average trip length, compared with the corresponding period last year. No congestion payments are expected to be incurred in 2018. For the full year, the Company projects a 9.8% increase in revenue and 12.6% increase in operating expenses, resulting in a projected 9.4% increase in EBITDA.

In May 2018, 407 issued $500 million Senior Notes, with the proceeds primarily used to repay the principal amounts owing under the Company’s credit facilities. The Company currently has a $300 million senior bank facility, which it expects to remain undrawn through year-end 2018. Net incremental borrowing for 2018 is expected to be approximately $78 million, substantially lower than the Company’s annual leverage increase target of $500 million, mainly because the Company utilized its prior year ending unrestricted cash balance during the year. The Company’s unrestricted cash balance reduced to $390.3 million at September 30, 2018, compared to $763.1 million at the beginning of the year.

The cash-based senior debt service coverage ratio (DSCR) with shadow amortization was 2.3 times (x) as at Q3 2018, whereas the cash-based senior and junior DSCR was 2.8x, both of which continue to support the ratings. Along with its plan to gradually increase leverage, 407 still expects to maintain the senior indenture DSCRs and senior and junior cash DSCR (net of cash income taxes) well above 1.7x and 2.0x, respectively, agreed upon with DBRS at the current rating levels. For 2019, DBRS estimates the senior DSCR with shadow amortization at approximately 2.5x, based on the Company’s forecasts, which DBRS views as plausible given its revenue and expense growth assumptions and leverage forecast of $500 million in net additional borrowings.

DBRS notes that the credit is comfortably positioned within the current rating levels. Negative rating pressure could result from a marked deterioration in financial metrics or if 407 were to increase its leverage at a pace materially quicker than expected without a commensurate improvement in traffic levels. A rating upgrade is considered unlikely.

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.

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.