DBRS Confirms 407 East Development Group’s Issuer Rating and Long-Term Senior Bond Rating both at BBB (high), Stable Trends

DBRS Limited (DBRS) confirmed 407 East Development Group General Partnership’s (ProjectCo or 407 East Development Group) Issuer Rating and the rating on ProjectCo’s Long-Term Senior Bonds at BBB (high). All trends are Stable. ProjectCo is the special-purpose entity (SPE) created to design, build, finance, maintain and perform lifecycle obligations of the Highway 407 east extension (the Extension or the Project) under a 33.6-year project agreement (PA) with the Province of Ontario (the Province; rated AA (low) with a Stable trend by DBRS). The rating continues to be supported by availability-based revenues from the Province; the pass-down of all service period obligations, including lifecycle risk, to an experienced service provider; and ProjectCo’s solid operating performance.

ProjectCo’s construction-related tasks were passed down to the general partnership of subsidiaries of SNC-Lavalin Group Inc. (rated BBB with a Stable trend by DBRS) and Ferrovial Agroman S.A. While substantial completion was achieved on June 9, 2016, final completion has yet to be achieved. Notwithstanding, DBRS does not consider the delay in reaching final completion to be a material risk, as only two minor deficiencies concerning lighting and embankment settlement remain, with the remaining works expected to be limited. According to ProjectCo, the final completion is currently expected in summer 2019 and a Final Completion Notice has been submitted to the Province.

Risks and responsibilities pertaining to routine and lifecycle maintenance during the service phase are passed down to a general partnership (the Service Provider) that is indirectly owned by SNC-Lavalin Group Inc. and Cintra Infraestructuras, S.A. The scope of services required under the PA is standard and includes preventive and lifecycle maintenance of the highway and coordination of emergency services. Parent guarantees of 250% of the average annual operation, maintenance and repair (OM&R) payment (indexed) upon termination, with liquid security provided by a letter of credit of 300% of the average annual OM&R payment (indexed; may be reduced to 50% if the Service Provider achieves a certain rating threshold), will back the Service Provider’s obligations. Operational performance has been good with no incurrence of failure points or payment deductions to date. Key financial metrics, such as the debt service coverage ratio, are in line with expectations at financial close.

DBRS is encouraged by the sound operating performance demonstrated since substantial completion. If final completion is achieved and failure points and payment deductions continue to be minimal, a positive rating action is possible. However, DBRS notes that ProjectCo’s relatively limited resilience to shocks in the lifecycle budget during operation is expected to constrain the rating to a maximum of A (low).

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.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.

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