DBRS Confirms British Columbia Ferry Services Inc. at A (high), Stable Trend

DBRS Limited (DBRS) confirmed the Issuer Rating and Senior Secured Bonds rating of British Columbia Ferry Services Inc. (BC Ferries or the Company) at A (high) with Stable trends. The ratings continue to be supported by traffic growth, the stable debt level and the Company’s proven operating resilience and reliable management. The ratings are tempered by the implementation of fare reductions on April 1, 2018, and uncertainties around how the new British Columbia Ferries Commissioner (the Commissioner) will react to the challenges faced by BC Ferries.

In F2018, passenger volume and vehicle traffic rose 4.7% and 5.0%, respectively. Total revenue and operating expenses increased by 4.8% and 7.8%, respectively. EBITDA declined 1.7% in F2018, which, along with the increased KfW loan repayment, led to a decreased debt service coverage ratio (DSCR) of 2.9 times (x) as at the end of F2018, consistent with expectations.

BC Ferries applied fare reductions on April 1, 2018, which were essentially as expected and largely offset by relevant provincial contributions. Total revenues continued to rise in H1 F2019, up 1.8%, mainly driven by traffic growth. Operating expenses rose 6.8% in H1 F2019, mainly because of additional round trips, schedule adjustments to some routes and the re-introduction of the upgraded Spirit of British Columbia into service. EBITDA dropped 5.8% during H1 F2019.

Assuming passenger volume growth of 1.2% in F2019 and with the level of total debt expected to remain essentially unchanged, the Company forecasts EBITDA to improve by 1.6% during F2019, resulting in a DSCR of 2.7x at the end of F2019. This modest EBITDA growth will be mainly supported by the removal of a fuel rebate, higher provincial contributions, and management’s response to flattening traffic growth. DBRS views the forecast DSCR level as plausible given the results to date and supportive of the ratings.

DBRS notes that the voluntary fare reductions in April 2018 were implemented in a controlled manner and do not contradict with the objectives of the Coastal Ferry Act, including to maintain the sustainability of the Company, which should be taken into consideration by the Commissioner in setting the price caps for Performance Term 5 (PT5). DBRS is of the view that the outlook for the business remains favourable. However, while not expected, this view may change if the final decision by the Commissioner regarding PT5 includes setting the target DSCR or equity-to-total capitalization ratio at levels that represent a material erosion from current levels. A negative rating action may be possible if the Company becomes unable to reliably maintain a DSCR of at least 2.5x. Given the relatively recent rating upgrade, a further positive rating action is considered unlikely at this time.

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 & Criteria.

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.

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