DBRS Morningstar Confirms Muskrat Falls/Labrador Transmission Assets Funding Trust and Labrador-Island Link Funding Trust at AAA with Stable Trends

DBRS Limited (DBRS Morningstar) confirmed the ratings of the 2013 and 2017 Guaranteed Senior Bonds (together, the Bonds), totalling $7.9 billion, issued by Muskrat Falls/Labrador Transmission Assets Funding Trust and Labrador-Island Link Funding Trust (together, the Issuers) at AAA with Stable trends. The ratings are based on two unconditional and irrevocable federal loan guarantees: the 2013 Federal Loan Guarantee (FLG1) and the 2017 Federal Loan Guarantee (FLG2; together with FLG1, the Guarantee) of substantially similar nature provided by the Government of Canada (Canada or the Guarantor). This rating action follows DBRS Morningstar’s confirmation of Canada’s sovereign rating at AAA with a Stable trend on September 22, 2021 (see DBRS Morningstar’s related press release dated September 22, 2021).

DBRS Morningstar notes that the Guarantee has met its criteria for a flow-through of Canada’s sovereign rating to the Bonds. The Guarantee constitutes an irrevocable, unconditional, absolute, and continuing obligation of Canada. There is no requirement to exhaust recourse against the Issuers before bondholders are entitled to the payment from Canada; all defences are waived by the government and subrogation rights are postponed as long as the guaranteed obligations are still outstanding; and no amendment of the Guarantee is permitted, except by agreement with the Indenture Trustee. Furthermore, release of the Guarantor is permitted only when all its obligations are fully repaid. DBRS Morningstar expects that the Bonds’ rating will continue to move in tandem with Canada’s sovereign rating, irrespective of the performance of the Muskrat Falls Project (the Project). Any rating upgrade or downgrade is expected to follow DBRS Morningstar’s similar rating action on Canada.

The Issuers were created as single-purpose financing trusts to facilitate the financing of the Project, an 824-megawatt hydroelectric power-generating facility, and the development of associated transmission lines in Newfoundland and Labrador (the Province; rated A (low) with a Stable trend by DBRS Morningstar). The Issuers’ sole business is to issue the Bonds and on-lend proceeds to the Project via back-to-back loans. The Issuers sized the Bonds to cover interest payment during construction. The in-service costs (including financing costs) are currently estimated at $13.1 billion, which has not changed since the last update as of September 28, 2020. The first three generating units are now in service, the last unit is expected to be in service in early November 2021 and the Labrador-Island Link is currently expected to be in service by the end of the year. In July 2021, the federal government and the Province reached a $5.2 billion agreement in principle to help mitigate the expected rate increases driven by cost overruns associated with the Project. As part of the agreement, the Project is expected to issue additional bonds of $1 billion by the end of the year. The proceeds will be used to fund all principal due before June 30, 2029, under the existing FLG1 and FLG2. Canada is committed to providing a federal loan guarantee (FLG3) for the new debt issue, which will reduce the Project's overall funding cost.

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 Guarantees and Other Forms of Support (May 31, 2021; https://www.dbrsmorningstar.com/research/379424), 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].

DBRS Limited
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada
Tel. +1 (416) 593 5577