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

DBRS Limited (DBRS Morningstar) changed the trend on British Columbia Ferry Services Inc.’s (BC Ferries or the Company) Issuer Rating and Senior Secured Bonds rating to Stable from Negative and confirmed both ratings at A (high). The trend change is mainly supported by the significant cash contribution from the Province of British Columbia (the Province; rated AA (high) with a Stable trend by DBRS Morningstar) in December 2020, as well as by the Company's decision to defer approximately one-third of its capital expenditures during Performance Term (PT) 5 to future performance terms, removing leverage needs.

Despite the impact of the Coronavirus Disease (COVID-19) pandemic that began in March 2020, total revenue increased by 1.7% in F2020. Total expenses grew approximately 3.8%, which outpaced revenue growth, resulting in a 3% decline in EBITDA. This, combined with slightly higher interest expenses driven by the new bond issuance in October 2019, led to a debt service coverage ratio (DSCR) of 2.8 times (x) (without including the $45 million total bullet repayments of the KfW loans) compared with 3.0x in F2019.

During H1 F2021 (the six-month period ended September 30, 2020), total revenues were down 35% compared with the same period in the prior year. Vehicle and passenger volumes declined by 28.7% and 43.0%, respectively. Operation and maintenance expenses decreased by 21.0% and EBITDA decreased by 57.5% compared with H1 F2020. As of September 30, 2020, the trailing-12-month DSCR was reported to be 1.46x, below the 1.50x threshold for additional indebtedness, which triggered the requirement for the Company to increase its debt service reserves to 12 months from six months of interest payments.

Both the Company and the Province responded to the coronavirus pandemic quickly. In April 2020, the Province agreed to lower ferry capacity on major routes without reducing ferry transportation fees on a temporary basis. Recognizing the essentiality of the ferry services in supporting coastal communities, the Province also entered into a contribution agreement with BC Ferries on November 11, 2020; under this agreement, the Province made a one-time contribution of $308 million to BC Ferries, aiming to neutralize the financial impacts of coronavirus on the Company during F2021 and F2022.

The traffic volume assumptions embedded in the DBRS Morningstar Base Case, as defined in the press release “DBRS Morningstar Changes Trend of British Columbia Ferry Services Inc. to Negative” (May 27, 2020), remain essentially unchanged. Mainly because of the additional revenue to be recognized during F2021 and F2022 as a result of the Province’s contribution, DBRS Morningstar expects the Company's DSCR to remain above 2.5x during the remainder of PT5 under its base-case traffic forecast.

In DBRS Morningstar’s view, the Company’s outlook has become more resilient compared with the onset of the coronavirus pandemic, not only because vaccines are now becoming accessible to the broader population, but also, and more importantly, because of the prompt and meaningful government supports observed to date, which strengthen DBRS Morningstar’s view of the essentiality of the services provided by BC Ferries. While DBRS Morningstar considers a further positive rating action to be unlikely at this time, the ratings can withstand negative financial impacts to a larger extent. Material and negative deviations from DBRS Morningstar’s base-case assumptions could still have a negative rating impact.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

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

The principal methodology is Rating Public-Private Partnerships (August 19, 2020), 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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