DBRS Morningstar Changes Trend on Strait Crossing Development Inc. to Negative, Confirms Rating at BBB (low)

DBRS Limited (DBRS Morningstar) changed the trends on the Issuer Rating and 6.17% Revenue Bonds rating of Strait Crossing Development Inc.’s (SCDI or the Company) to Negative from Stable and confirmed both ratings at BBB (low).

On March 21, 2020, the Government of Prince Edward Island (PEI; rated “A” with a Stable trend by DBRS Morningstar) instituted a border checkpoint to screen all inbound traffic and directed anyone entering PEI from anywhere in the world, including interprovincial travellers, to self-isolate for 14 days to mitigate the spread of Coronavirus Disease (COVID-19). A similar directive was issued by the Government of New Brunswick (rated A (high) with a Stable trend by DBRS Morningstar) on March 25, 2020. Subsequently, all nonessential travel across the border was prohibited. These instructions reduced the traffic on the bridge to bare essential services, which mostly consists of transportation of goods. As a result, for the month of April 2020, passenger and commercial traffic was around 92% and 13% lower than the budget, respectively. For as of April 2020, year-to-date passenger traffic was 37% lower than the budget, while commercial traffic stood at 2% above the budget. PEI has since announced a four-phase plan to ease restrictions and reopen restaurants, businesses, and services starting in May 2020. For the year ending December 2019, traffic on the bridge continued to outperform with a total volume of 887,882, which exceeded the budget by 1.9% and surpassed the previous year volume by 2.7%.

The base case assumes that passenger traffic will be reduced by 90% compared with the budget for April to May 2020, followed by a 70% reduction until the end of September 2020. For commercial traffic, the base case assumes a 30% reduction in the commercial traffic between April and September 2020. The traffic impact of the coronavirus pandemic is likely to materially deteriorate the DBRS Morningstar-calculated debt service coverage ratio (DSCR) in the shorter term, before returning to BBB-range financial metrics by September 2021. For the DSCR, defined in the Master Trust Indenture and based on the calculation for a 24-month period, the financial metrics are expected to return to BBB range by September 2022.

The trend change is primarily as a result of the near-term traffic volume challenges and expectation of deteriorated levels of DSCR in the shorter term, which are partly mitigated by the healthy cash reserve balance, including the general revenue account and fully funded six-month debt service reserve account. Supporting the rating is the essential service provided by the bridge to connect PEI with the mainland, its monopoly position on vehicular access during winter, and the considerable time savings offered, along with the healthy cash reserves.

DBRS Morningstar continues to monitor the coronavirus-related situation closely and believes that, in addition to the factors mentioned in the DBRS Morningstar rating report published on November 21, 2019, a prolonged impact of the pandemic on the Company’s business and financial profile could put further negative pressure on the Company’s credit rating. Conversely, DBRS Morningstar will consider changing the trend on the Company’s rating to Stable upon meaningful traffic recovery and the DSCR returning to BBB-range metrics.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The principal methodology is Rating Public-Private Partnerships (August 23, 2019), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

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.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.

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

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