DBRS Morningstar Confirms Ratings of 407 International Inc.

DBRS Limited (DBRS Morningstar) confirmed 407 International Inc.’s (407 or the Company) Issuer Rating and 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, leverage intentions, and constraints on future capacity expansions.

After growing 1.4% in 2018, traffic as measured by vehicle kilometres travelled declined 0.3% in the first nine months of 2019, reflective of a 1.1% decrease in the number of trips and a 0.8% increase in average trip length, compared with the corresponding period last year. The decline was mainly attributed to unfavourable weather conditions, offset by higher construction activity on alternate routes. DBRS Morningstar expects the Company to incur a small amount of congestion payments in 2019, which marks the first year that the Company makes such payments. For the full year, the Company projects an 8.3% increase in revenue and 9.6% increase in operating expenses, resulting in a projected 8.1% increase in EBITDA.

The Company incurred incremental borrowing of approximately $70 million in 2018. In March 2019, 407 issued $800 million Senior Notes, with part of the proceeds used to redeem, along with other available funds, $300 million of pre-existing Senior Notes, repay $60 million owing to certain Canadian chartered banks, and fund debt service reserve accounts. Net incremental borrowing for 2019 is expected to be $524 million, slightly higher than expectation. On a 12-month trailing basis, the cash-based senior debt service coverage ratio (DSCR) with shadow amortization was 2.3 times (x) as at Q3 2019 and the cash-based senior and junior DSCR was 2.9x, both of which are supportive of the ratings.

For the next three years till 2023, the Company currently plans to incur incremental leverage of approximately $700 million per year, notably higher than the previous expectation of $500 million per year. Despite its plan to gradually increase leverage, 407 still expects to maintain the senior indenture DSCR and senior and junior cash DSCR (net of cash income taxes) above 1.7x and 2.0x, respectively, which represent the thresholds considered by DBRS Morningstar to be suitable for the current rating levels. While the metrics are still expected to be over the thresholds under the base case, the cushions are declining, and therefore, the Company’s ability to weather an unexpected traffic shock has decreased. Negative rating pressure could result from a marked deterioration in financial metrics caused by, for example, 407 increasing its leverage at a pace materially quicker than expected without a commensurate improvement in traffic levels. A rating upgrade is 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 & 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 [email protected].

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar 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 [email protected].

For more information on this credit or on this industry, visit www.dbrs.com or contact us at [email protected].

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