DBRS Morningstar Confirms 407 East Development Group Ratings at A (low) With Stable Trends

DBRS Limited (DBRS Morningstar) confirmed 407 East Development Group’s (ProjectCo) Issuer Rating and Long-Term Senior Bonds rating at A (low). Both trends remain Stable. The rating confirmations are a reflection of ProjectCo’s sound operating performance since substantial completion. The ratings continue to be supported by the availability-based revenue from the Province of Ontario (the Province; rated AA (low) with a Stable trend by DBRS Morningstar) and the pass down of all service period obligations, including lifecycle risk, to an experienced service provider.

ProjectCo is the special-purpose entity created to design, build, finance, maintain, and perform lifecycle obligations of the Highway 407 East Extension (the Project) under a 33.6-year project agreement (PA) with the Province. ProjectCo passed down construction-related tasks to the general partnership (GP) of subsidiaries of SNC-Lavalin Group Inc. (rated BB (high) with a Stable trend by DBRS Morningstar) and Ferrovial Construction S.A. All risks and responsibilities pertaining to the routine and lifecycle maintenance during the service phase are passed down to another GP, which is guaranteed and indirectly owned by SNC-Lavalin Group Inc.; Cintra Infrastructures SE (formerly, Cintra Infraestructuras, S.A.); and Cintra Global SE (formerly, Cintra Global Ltd.).

DBRS Morningstar noted the scope of services required under the PA is standard and includes preventive and lifecycle maintenance of the highway and coordination of emergency services. Operational performance has been robust, with no failure points or payment deductions incurred to date. According to the management, the Project has not been materially affected by the Coronavirus Disease (COVID-19) pandemic. Key financial metrics, such as the minimum debt service coverage ratio and breakeven ratios, are in line with expectations at financial close.

While not expected, if the Project’s operating performance deteriorates, leading to material deductions or an accumulation of failure points that may trigger various contractual thresholds, DBRS Morningstar could take a negative rating action. DBRS Morningstar notes ProjectCo’s relatively limited resilience to shocks in the lifecycle budget during operation (i.e., 20%) will likely constrain the ratings to a maximum of A (low).

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no environmental, social, and governance factors that had a significant or relevant effect on the credit analysis.

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/396929.

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

The principal methodology is Rating Public-Private Partnerships (August 19, 2021; https://www.dbrsmorningstar.com/research/383244), 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 (May 17, 2022; https://www.dbrsmorningstar.com/research/396929).

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.

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

The full report providing additional analytical detail is available by clicking on the link under Related Documents below or by contacting us at [email protected].

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

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