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

DBRS Limited (DBRS Morningstar) 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 Company’s proven operating resilience, and reliable management.

In F2019, passenger volume and vehicle traffic rose 1.2% and 1.9%, respectively. Total revenue and operating expenses increased by 3.0% and 3.8%, respectively. As calculated by DBRS Morningstar, EBITDA increased 0.9% in F2019, which led to a slightly higher debt service coverage ratio (DSCR) of 2.8 times (x) as at the end of F2019, in line with expectations.

Total revenues have continued to rise in the first half of 2020 (H1 F2020), up 5.4% compared with H1 F2019, driven by both traffic growth and increase in average fees. Operating expenses rose 4.3% in H1 F2020, mainly because of additional round trips, the introduction of the “Northern Sea Wolf,” and the re-introduction of the upgraded “Spirit of Vancouver Island” into service. EBITDA increased 7.3% during H1 F2020. The Company forecasts EBITDA in F2020 to remain essentially the same as that in F2019, which, with the issuance of the $250 million Series 19-1 Senior Secured Bonds in October 2019, would result in a DSCR of 2.6x at the end of F2020. DBRS Morningstar views the forecast DSCR level as plausible given the results to date and supportive of the ratings.

DBRS Morningstar notes that on, September 30, 2019, the BC Ferry Commissioner (the Commissioner) made the final determination regarding Performance Term 5 (PT5), including an annual price cap increase of 2.3%, which compares favourably with the former 1.9% annual cap approved for PT4. The Commissioner also outlined a target minimum DSCR of 2.5x and equity as a percentage of total capitalization of at least 17.5% at all times throughout PT5. These figures are in line with previous levels during PT4 and remain supportive of the rating. A negative rating action may be possible if the Company becomes unable to reliably maintain a DSCR of at least 2.5x. DBRS Morningstar considers a further positive rating action to be unlikely at this time.

DBRS Morningstar notes that there is material deviation from the methodology, “Rating Public-Private Partnerships,” as DBRS Morningstar used EBITDA instead of cash flow available for debt service to calculate DSCR.

DBRS Morningstar notes that the above press release was amended on April 14, 2020, to add a sentence regarding material deviation. The amendment was minor and would not impact the understanding of the reader.

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.

DBRS Morningstar will publish a full report shortly that will provide addi¬tional analytical detail on this rating action. If you are interested in receiving this report, contact 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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