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

DBRS Limited (DBRS Morningstar) confirmed the ratings of the 2013, 2017, and 2022 Guaranteed Senior Bonds (together, the Bonds), issued by Muskrat Falls/Labrador Transmission Assets Funding Trust and Labrador-Island Link (LIL) Funding Trust (together, the Issuers) at AAA, with Stable trends. The ratings are based on three unconditional and irrevocable federal loan guarantees of substantially similar nature provided by the Government of Canada (Canada or the Guarantor): the 2013 Federal Loan Guarantee (FLG1), the 2017 Federal Loan Guarantee (FLG2), and the 2022 Federal Loan Guarantee (FLG3; together with FLG1 and FLG2, the Guarantee). This rating action follows DBRS Morningstar’s confirmation of Canada’s sovereign rating at AAA with a Stable trend (see DBRS Morningstar’s related press release dated September 9, 2022).

DBRS Morningstar notes 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 hydroelectric generating facility and the associated transmission links (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 the associated transmission links in Newfoundland and Labrador (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 $13.4 billion, which was updated in June 2022. Since November 2021, all four generating units are in service. However, the LIL has yet to deliver power levels up to the full generating capacity, because of the continuing technical issue surrounding GE's bipole software. The final commissioning of LIL to high-power levels is expected in the upcoming winter season, for cold temperatures to drive up system load.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE (ESG) CONSIDERATIONS
The ESG factors refer to those associated with the Guarantor or Canada.

Rating actions on Canada are likely to have an impact on this rating. ESG factors that have a significant or relevant effect on the credit analysis of Canada are discussed separately at https://www.dbrsmorningstar.com/issuers/2100.

There were no Environmental/Social/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/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (May 17, 2022).

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

The principal methodology is DBRS Morningstar Criteria: Guarantees and Other Forms of Support (April 4, 2022; https://www.dbrsmorningstar.com/research/394683), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

A description of how DBRS Morningstar analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/397223/interplay-of-global-corporate-finance-rating-methodologies-when-analyzing-corporate-finance-transactions.

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.

DBRS Morningstar will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving this report, contact 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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