DBRS Morningstar Confirms 407 East Development Group’s Issuer Rating and Long-Term Senior Bonds 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 Positive 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 with the Province. All risks and responsibilities pertaining to the routine and lifecycle maintenance during the service phase are passed down to another general partner, which is guaranteed and indirectly owned by SNC-Lavalin Group Inc. (rated BB (high) with a Stable trend by DBRS Morningstar), Cintra Infrastructures SE (formerly Cintra Infraestructuras, S.A.), and Cintra Global SE (formerly Cintra Global Ltd.).

The Project has been in operation for more than seven years and has not incurred any failure points and any associated deductions to date. As a result, the financial performance has been relatively stable since the opening of the highway.

The pavement and structures of the Project remain in good condition in accordance with the Senior Creditors’ Technical Advisor’s (SCTA) 2022 report. The SCTA also noted that the Service Provider has been operating and maintaining the Project in accordance with the contractual requirements. The better-than-expected asset condition has resulted in an accumulated lifecycle cost savings of about $2.4 million, which has been deposited in the Lifecycle Deficiency Account.

For the next several years, the Project's lifecycle activities are expected to increase, and these activities will primarily entail asphalt rehabilitation and expansion joints. This will be the Project's first structural intervention, which is one of the three structural intervention programs that were developed in its comprehensive lifecycle plan at financial close. ProjectCo indicated the total lifecycle cost is budgeted to average around $8.5 million (in 2012 dollars) annually in 2024–27.

The Project has benefitted from the higher-than-expected interest rate, mainly through receiving higher interest income. As a result, the Project's debt service coverage ratio (DSCR) of 1.25 times (x) for the year ended December 31, 2022, was slightly above the projected DSCR of 1.23x.

DBRS Morningstar could take a negative rating action if the Project’s operating performance deteriorates significantly, leading to material deductions or an accumulation of failure points that may trigger various contractual thresholds. A negative rating action may also be warranted if there is a deterioration in the credit quality of the guarantors that are providing the performance guarantee to the Service Provider. DBRS Morningstar notes that 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, GOVERNANCE CONSIDERATIONS
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/416784/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (July 4, 2023).

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

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

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.

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 credit rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for this credit 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 credit 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 credit ratings are under regular surveillance.

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

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