DBRS Assigns “A” Rating to 407 International Inc.’s New Issues

DBRS Limited (DBRS) assigned a rating of “A” to the $300 million Series 19-A1 Senior Secured Fixed-Rate Medium-Term Notes issue (the Series 19-A1 Notes) and the $500 million Series 19-A2 Senior Secured Fixed-Rate Medium-Term Notes issue (the Series 19-A2 Notes, and together with the Series 19-A1 Notes, the Notes) of 407 International Inc. (407 or the Company). Both trends are Stable. The Notes have been issued from 407’s Shelf Prospectus dated November 30, 2018. The rating being assigned is based upon the rating on already-outstanding series of the above-mentioned debt instrument.

The intended use of proceeds from the Series 19-A1 Notes will be (1) to redeem, along with other available funds, the $300 million Series 10-A2 Notes, which mature on June 16, 2020; and (2) to fund the Series Reserve Account in the Debt Service Reserve Fund (as both terms are defined in the Indenture) in respect of the Notes. The proceeds from the Series 19-A2 Notes issuance will be used (1) to repay $60 million owing by the Company to certain Canadian chartered banks under the Company’s syndicated bank credit facility, (2) to fund the Series Reserve Account in the Debt Service Reserve Fund and (3) for general corporate purposes.

The Series 19-A1 Notes have a maturity date of March 6, 2030, and the Series 19-A2 Notes have a maturity date of March 8, 2049. The Notes rank pari passu with all other senior obligations of 407. Correspondingly, the “A” rating and Stable trends are consistent with the ratings and trends currently assigned to the Company’s senior debt.

For 2018, vehicle kilometres travelled increased by 1.4% year over year (YOY), driven by a 0.7% increase in total trips and a 0.7% increase in average trip length, mainly attributable to longer trips by light vehicles from economic growth and construction activities on alternate routes. Revenues increased 9.7%, primarily attributable to the toll rate increase. Operating expenses increased by 9.6%, and full-year EBITDA increased by 9.7%. No congestion payments were incurred during the year.

As of December 31, 2018, the senior debt service coverage ratio (DSCR), including shadow amortization, was 2.2 times (x), while junior and senior interest coverage was 2.7x, both as calculated by DBRS. DBRS notes that the Company plans to keep its $300 million bilateral credit facility undrawn, along with the $500 million syndicated bank credit facility established in February 2019, also undrawn, through year-end 2019. With the Company’s leverage forecast of $500 million in net additional borrowings per year, coverage metrics are expected to remain comfortably above the 1.7x and 2.0x targets agreed upon with DBRS at the current rating levels for the senior DSCR (with shadow amortization) and the junior and senior debt interest coverage metrics, respectively.

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 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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