Morningstar DBRS Finalizes Provisional Rating of "A" With Stable Trend to 407 International Inc

DBRS Limited (Morningstar DBRS) finalized the rating of "A" with a Stable trend on the $500 million Series 24-A2 Senior Secured Fixed-Rate Notes (the Notes) issued by 407 International Inc. (407 or the Company). The credit rating assigned to this newly issued debt instrument is based on the credit rating of an already-outstanding debt series of the above-mentioned debt instrument.

The Company plans to use the proceeds from the issuance of the Notes (1) to repay outstanding amounts under the Company's syndicate bank credit facility, (2) to fund the Series Reserve Account in the Debt Service Reserve Fund (as both terms are defined in the Indenture) in respect of the Notes, and (3) for general corporate purposes. The Notes will rank pari passu with all other senior obligations of 407, with a 30-year maturity and semi-annual interest payments.

KEY CREDIT RATING CONSIDERATIONS
As of June 30, 2024, total year-to-date Vehicle Kilometres Travelled (VKT) reached 96% of the 2019 level, in line with Morningstar DBRS' expectation. The Company is actively monitoring the effectiveness of the Schedule 22 mitigation measures. Morningstar DBRS currently projects 407's total revenue in 2024 to be 114% of the 2019 level and total traffic volume to fully recover to pre-pandemic levels by 2027. Based on its assumption that the annual average toll increase between 2025 and 2030 will be on par with the pre-pandemic historical level and considering the Schedule 22 payment mitigation strategies to be implemented by 407, Morningstar DBRS forecasts the Company's total revenues (net of Schedule 22 payments) to continue to grow through 2030, although the revenue growth in 2025 will be largely muted because of the Schedule 22 payments (the Base Case Forecast).

The Company still intends to maintain its financial metrics above the thresholds Morningstar DBRS considers suitable for the current credit rating levels (refer to the Financial Outlook section below). Morningstar DBRS expects the syndicate bank credit facility to remain essentially undrawn by YE2024. Any additional debt issuance is subject to a credit rating affirmation test. Morningstar DBRS considers the Company's subordinated debt as having characteristics of equity for the purpose of rating the Senior and Junior bonds.

CREDIT RATING DRIVERS
Absence of substantial leverage reduction on a sustainable basis and given the inherent volume risk of the project, a credit rating upgrade is unlikely. Negative credit rating pressure may result from a marked deterioration in Morningstar DBRS' expected revenue outlook, insufficient liquidity, or a leverage increase faster than what can be justified by sustainable traffic levels.

FINANCIAL OUTLOOK
Under the Base Case Forecast and without assuming additional debts except the Notes, Morningstar DBRS expects the senior debt service coverage ratio (DSCR), including shadow amortization, to remain above 1.7 times (x) and the senior and junior cash interest coverage ratios (ICRs) above 2.0x (both net of cash income taxes), which represent the thresholds Morningstar DBRS considers suitable for the current credit rating levels.

CREDIT RATING RATIONALE
The credit rating is underpinned by (1) the economic strength of the catchment area that 407 relies on, (2) a lack of major competition, (3) legislative protection to enforce toll collection, (4) healthy liquidity, and (5) the requirement for a credit rating affirmation before issuing new debt. The challenges include (1) the inherent volatility of toll roads and elevated uncertainties in future growth, (2) a tradition that favours dividend distribution over debt containment, (3) potentially constrained tolling flexibility and Schedule 22 payments, (4) the inflation-linked debt instruments, and (5) refinancing risk.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factor(s) that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (13 August 2024), https://dbrs.morningstar.com/research/437781

RATING DRIVER AND FINANCIAL RISK ASSESSMENT (FRA)

A) Weighting of Rating Driver Factors
In the analysis of the Company, the Rating Driver factors listed in the methodology are considered in the order of importance.

B) Weighting of FRA Factors
In the analysis of the Company, the following FRA factor listed in the methodology (Part Two - Rating Volume-Based PPPs) was considered more important: minimum DSCR

C) Weighting of the Rating Drivers and the FRA
In the analysis of the Company, the FRA carries greater weight than the Rating Drivers.

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

Morningstar DBRS applied the following principal methodology:
-- Global Methodology for Rating Public-Private Partnerships (13 August 2024), https://dbrs.morningstar.com/research/437820

Morningstar DBRS credit ratings may use one or more sections of the Morningstar DBRS Global Corporate Criteria (April 15, 2024; https://dbrs.morningstar.com/research/431186), which covers, for example, topics such as holding companies and parent/subsidiary relationships, guarantees, recovery, and common adjustments to financial ratios

The following methodologies have also been applied:
-- Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (August 13, 2024) at https://dbrs.morningstar.com/research/437781.

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

A description of how Morningstar DBRS analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/431153.

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 info-DBRS@morningstar.com.

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.

Morningstar DBRS 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. Morningstar DBRS trends and credit ratings are under regular surveillance.

Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available on dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.

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