DBRS Morningstar Confirms Issuer Rating of Strait Crossing Development Inc. at BB (high), Changes the Trend to Positive from Stable, Confirms Rating of 6.17% Revenue Bonds at BBB (low), Stable Trend

DBRS Limited (DBRS Morningstar) confirms Strait Crossing Development Inc.’s (SCDI or the Company) Issuer Rating at BB (high) and changes the trend to Positive from Stable, and confirms the rating of the 6.17% Revenue Bonds rating at BBB (low) with a Stable trend based on the unchanged recovery rating of RR1. This change in trend of the Issuer rating reflects a return of debt service coverage ratios (DSCRs) to investment-grade levels after a prolonged period of pressured financial metrics. Also, the General Revenue Account (GRA) funds available are now at pre-pandemic levels, supporting the trend change. The confirmation of the rating of the Revenue Bonds at BBB (low) reflects the Issuer rating of BB (high) combined with DBRS Morningstar’s assessment of the likelihood of full recovery of outstanding debt principal in a case of bond default. The Issuer rating was downgraded on November 29, 2021, as a result of depressed DSCRs exacerbated by an expectation of low cash reserve balance at the time.

Q1 2022 was affected by omicron and the resulting implementation of further containment measures by the Government of Prince Edward Island (PEI), resulting in a slower-than-expected recovery. For the rest of 2022, traffic has recovered significantly, rising to approximately 97% of pre-pandemic volumes in Q2 2022, and even surpassing 2019 levels (102%) during the summer high season months. DBRS Morningstar believes this pattern of good summer results points to continuing demand for tourism services and an eventual recovery to normalized demand now that the end of the pandemic is in sight.

DBRS Morningstar views 2023 as the recovery year, with traffic and revenues back to 2019 levels, and further stimulated by the Canada Winter Games that will take place in PEI during Q1 2023. DBRS Morningstar rating case projects a DSCR for 2023 exceeding 1.3x, supporting the strength of the Company and the full recovery ahead of what DBRS Morningstar expected in the last review. DBRS Morningstar expects DSCRs to remain at BBB levels until the end of the concession, as well as a healthy GRA balance comparable to pre-pandemic levels.

A positive rating action could occur if traffic and revenues continue to recover as expected in 2023. A negative rating action could occur if the coronavirus-related situation further affected the Company’s business and financial profile, resulting in a materially lower GRA balance. The incurrence of large, unexpected maintenance or rehabilitation items could also put negative pressure on the ratings. DBRS Morningstar will consider a positive action on the Issuer rating provided that projections on traffic and revenues recovery are met and sustained, with resulting DSCRs that are commensurate with BBB-range metrics.

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 (May 17, 2022).

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

The principal methodologies are Rating Public-Private Partnerships (August 30, 2022; https://www.dbrsmorningstar.com/research/402155), and DBRS Morningstar Criteria: Recovery Ratings for Non-Investment-Grade Corporate Issuers (September 1, 2022; https://www.dbrsmorningstar.com/research/402218) 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).

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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