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

DBRS Limited (DBRS Morningstar) assigned a rating of “A” to the $700 million Series 20-A1 Senior Secured Fixed-Rate Medium-Term Notes (the Notes) of 407 International Inc. (407 or the Company). The trend is 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 issuance of the Notes will be (1) to repay approximately CAD 135 million the Company owes to certain Canadian chartered banks under the Company’s senior secured revolving credit facilities, (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, and (3) for general corporate purposes.

The Series 20-A1 Notes have a maturity date of March 7, 2050, and rank pari passu with all other senior obligations of 407. Correspondingly, the “A” rating and Stable trend are consistent with the rating and trend currently assigned to the Company’s senior debt.

For 2019, vehicle kilometres travelled slightly decreased by 0.2% year over year, driven by a 1.2% decrease in total trips, and partially offset by a 1.0% increase in average trip length which were mainly attributable to construction activities on alternate routes. Revenues increased 8.3%, primarily attributable to the toll rate increase. Operating expenses increased by 9.2%, and full-year EBITDA increased by 8.1%. Modest Schedule 22 Payment (congestion payments) was incurred during the year and is expected to be paid in 2020.

As of December 31, 2019, the senior debt service coverage ratio (DSCR), including shadow amortization, was 2.2 times (x), while junior and senior interest coverage was 3.1x, both per DBRS Morningstar’s calculations. DBRS Morningstar notes that the Company plans to keep its $300 million bilateral credit facility essentially undrawn, along with the $500 million syndicated bank credit facility established in February 2019, also essentially undrawn, through year-end 2019. With the Company’s leverage forecast of $700 million in net additional borrowings per year, 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 DBRS Morningstar considers to be suitable for the current rating levels.

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 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.

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