DBRS Morningstar Confirms Ratings on 407 International Inc.; Trend Remains Negative

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 remain Negative. The ratings continue to be supported by the long-term economic fundamentals of the catchment area and 407’s adequate liquidity position. The Negative trends mainly reflect the uncertainties related to 407's financial recovery, which depends on how successfully the Province of Ontario (Ontario or the Province; rated AA (low) with a Stable trend by DBRS Morningstar) reopens, how fast economic activities return to normal, and to what extent behaviour changes (e.g., working from home) of Highway 407 ETR users caused by the Coronavirus Disease (COVID-19) pandemic persist.

The Company received confirmation from the Province with respect to coronavirus-induced Schedule 22 payments. The Ontario Ministry of Transportation has confirmed that the pandemic is a force majeure event and that the Company is not subject to congestion payment provisions under the Concession Agreement until traffic recovers to prepandemic levels (measured as the average traffic volumes during 2017–19) or until the Company raises toll rates. Either of these events will terminate the force majeure determination and the Company would then be subject to congestion payments (as applicable) commencing in the subsequent year. While such confirmation provides favourable relief to the credit, DBRS Morningstar notes that the Company could be relatively constrained from relying on toll increases to boost its financial recovery in the near term, temporarily dampening the resilience of its performance against unexpected traffic shocks.

Traffic volumes in 2020 were significantly affected by the coronavirus pandemic and declined 45.3% on a year-over-year basis, while revenues declined 39.6%. During Q1 2021, traffic volumes were still 54.8% lower than the same period in 2019. DBRS Morningstar currently assumes that 407’s revenues will be 38%, 20%, and 15% below 2019 levels in 2021, 2022, and 2023, respectively, before reaching a full recovery in 2024 (DBRS Morningstar base-case assumptions).

The Company still intends to maintain the senior indenture debt service coverage ratio (DSCR) and senior and junior cash interest coverage ratio (ICR), net of cash income taxes, above 1.7 times (x) and 2.0x, respectively, which represent thresholds DBRS Morningstar considers to be suitable for the current rating levels. Under the DBRS Morningstar base-case assumptions and assuming no additional leverage through 2024, the senior DSCR with shadow amortization and the senior and junior ICR will rise to approximately 1.7x and 2.0x, respectively, in 2022 and gradually improve over time.

The ratings could stabilize if the Company proves able to maintain the DSCR thresholds of 1.7x and 2.0x on a sustainable basis. DBRS Morningstar may take negative rating action if it becomes apparent that the Company will not be able to restore the DSCR thresholds of 1.7x and 2.0x or if 407’s liquidity becomes insufficient, and the ratings may also be under pressure if the Company decides to increase its leverage, for reasons such as dividend payouts, before the traffic volume has sufficiently recovered.

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; https://www.dbrsmorningstar.com/research/365975), which can be found on dbrsmorningstar.com under Methodologies & Criteria. Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021; https://www.dbrsmorningstar.com/research/373262).

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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