DBRS Morningstar Confirms the Issuer Rating of 407 International Inc. at "A," Trends Remain Stable

DBRS Limited (DBRS Morningstar) confirmed 407 International Inc.’s (407 or the Company) Issuer Rating at “A,” the ratings on its Senior Bonds at “A,” Junior Bonds at A (low), and Subordinated Bonds at BBB. All trends remain Stable. The ratings continue to be supported by the long-term economic fundamentals of the catchment area and 407’s adequate liquidity position. The Stable trends reflect the satisfactory traffic volume recovery from the negative impact of the Coronavirus Disease (COVID-19) pandemic and improved financial metrics with reasonable buffer to withstand a conceivable economic downturn scenario.

The Company reported 2,212.8 million vehicle kilometres travelled (VKT) in 2022, representing a 31% growth on a year-over-year (YOY) basis, although this remains 19% below the 2019 level. Total revenues in 2022 reached $1,327.2 million, a 29.7% YOY growth and approximately 12% below the 2019 level, slightly better than expected. Total EBITDA in 2022 reached $1,138.8 million, almost one third higher than the prior year and 13% below the 2019 level, also better than expected.

For Q1 2023, the Company reported VKT and revenue at 15.3% and 4.6% lower than the same period in 2019, respectively. DBRS Morningstar currently assumes that 407’s revenues will be 95% and 100% of the 2019 level in 2023 and 2024, respectively; thereafter, DBRS Morningstar assumes it will take about another year for the annual VKTs to fully ramp up to the pre-pandemic level, after which traffic volume will grow at a modest pace similar to what had been observed before the pandemic (DBRS Morningstar base-case assumptions).

The Company still intends to maintain the senior debt service coverage ratio (DSCR), including shadow amortization, above 1.7 times (x) and the senior and junior cash interest coverage ratios (ICR), net of cash income taxes, above 2.0x, levels, which represent the thresholds DBRS Morningstar considers suitable for the current rating levels.

DBRS Morningstar assumes that the Company may issue under its short-term base shelf prospectus dated March 31, 2022, long-term senior bonds in 2023, ranking pari passu with all existing Senior Bonds. Under the DBRS Morningstar base-case assumptions, and assuming up to $500 million additional senior bullet bonds to be issued this year, DBRS Morningstar expects the senior DSCR with shadow amortization and the senior and junior cash ICR to remain above the 1.7x and 2.0x thresholds, respectively.

DBRS Morningstar's base-case forecasts do not assume any toll rate increases. If 407 increases toll rates, the Company will have to revert to paying congestion payments the following calendar year, with the force majeure period coming to an end. Depending on the quantum of increase, and the level of traffic volumes at that time, the congestion payments could negatively affect the financial metrics over the medium term. DBRS Morningstar expects the Company to increase toll rates only if there is a net financial benefit from doing so. DBRS Morningstar will revise the base-case forecast and assess scenarios as appropriate at that time.

While DBRS Morningstar expects the ratings to be supported by its base-case forecast and continue to be protected by the rating affirmation test, negative rating pressure may result from a marked deterioration in its base-case traffic outlook. A rating upgrade is unlikely.

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.

DBRS Morningstar applied the following principal methodology: Global Methodology for Rating Public-Private Partnerships (https://www.dbrsmorningstar.com/research/402155; August 30, 2022).

The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

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 rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the rating process for this rating action.

DBRS Morningstar had access to the accounts, management and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

This is a solicited credit rating.

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.

Information regarding DBRS Morningstar ratings, including definitions, policies, and methodologies, is available on www.dbrsmorningstar.com or contact us at [email protected].

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