DBRS Confirms MILIT-AIR Inc. at AAA, Stable

DBRS Limited (DBRS) has today confirmed the ratings on both the Amortizing Secured Bonds Series 1 and Amortizing Secured Bonds Series 2-1 (collectively, the Amortizing Bonds) issued by MILIT-AIR Inc. (MILIT-AIR or the Company) at AAA with Stable trends. MILIT-AIR is a not-for-profit corporation formed for the sole purpose of acquiring and making infrastructure assets (the Amortizing Bonds Assets) in support of the NATO Flying Training in Canada (NFTC) program available to a subsidiary of CAE Inc. (CAE).

CAE acquired Bombardier Inc.'s (Bombardier) interest in the NFTC program earlier this year. Bondholders approved a Trust Indenture amendment that allowed MILIT-AIR to amend certain agreements, which permitted it to consent to Bombardier selling its interest in the NFTC program to a subsidiary of CAE. Bondholder approval was obtained by way of an Extraordinary Resolution on September 15, 2015. The Trust Indenture and project contracts were subsequently amended and, pursuant to the amendments, MILIT-AIR was permitted to consent to the assignment of Bombardier’s interest in the NFTC program to CAE's subsidiary after the Government of Canada consented to the assignment under the Canada Services Agreement. The assignment was consented to by the Government of Canada and MILIT-AIR, and on September 30, 2015, the rights and obligations of Bombardier under the Concession and Agency Agreement and Leases were completely assigned to CAE's subsidiary.

DBRS has examined the amendments to the documents and notes that the amendments do not alter the fundamental credit strengths of the transaction.

The ratings remain underpinned by the AAA rating of the Government of Canada (Canada; confirmed by DBRS on October 2, 2015), which has an unconditional and irrevocable obligation to make payments (the Firm Fixed Fees) sufficient to service the Amortizing Bonds. The Firm Fixed Fees are payable to CAE for services rendered under the NFTC program and are assigned to the Collection Trustee in satisfaction of CAE’s obligation to make rental payments to MILIT-AIR for the Amortizing Bonds Assets (Rental Payments). In turn, the Collection Trustee transfers the Firm Fixed Fees to the Bondholder Trustee to service the Amortizing Bonds and pay the Company’s administrative costs. In the event that removing CAE from its capacity as contractor under the NFTC program was required, Canada would perform the obligations of CAE directly and make Rental Payments to MILIT-AIR, or would have to appoint a third-party replacement (which would assign the Firm Fixed Fees to the Collection Trustee), thus ensuring that Canada remains ultimately responsible for indirectly servicing MILIT-AIR’s bonds. So far, CAE has operated in accordance with the NFTC program requirements and has not committed an event of default under the project agreements.

Proceeds from MILIT-AIR’s $826 million Amortizing Bonds ($291.3 million outstanding as at December 31, 2014) were used to purchase aircraft, flight training devices and ground support equipment, all of which were in turn leased to firstly, Bombardier, and after assignment of Bombardier’s obligations earlier this year, to CAE, for the provision of the NFTC program. Under its Trust Indenture, the Company can only take on new debt if it has secured the funds necessary to pay for the incremental debt service costs. There continues to be no plan for the Company to take on new debt. As such, the debt burden is expected to continue to decline steadily going forward as a result of the scheduled principal amortization payments. Given that the credit profile of MILIT-AIR is linked to that of Canada, any revisions to the rating of Canada would trigger an equal change in the rating of the Company.

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

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 to the right under Related Research or by contacting us at info@dbrs.com.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

The applicable methodology is Rating Public-Private Partnerships, which can be found on our website under Methodologies.