DBRS Rates 407 International Inc. Senior Bonds at “A,” Stable Trend

DBRS Limited (DBRS) has today assigned a rating of “A” to the $350.0 million Series 16-A2 senior notes (the Notes) of 407 International Inc. (407 or the Company). DBRS has also confirmed the pre-existing Senior Bonds rating of the Company at “A” as well as its Junior Bonds rating at A (low) and Subordinated Bonds rating at BBB. All trends are Stable.

The Notes have been issued from 407’s March 18, 2015, Shelf Prospectus. The intended use of proceeds from the Notes will be for (1) the repayment of approximately $289.0 million in respect of the Company’s 5.328% Real Return Senior Bonds, Series 99-A4, due December 1, 2016, upon maturity; (2) funding the Series Reserve Account in respect of the Notes; and (3) general corporate purposes. The financing is generally in line with DBRS’s expectations incorporated in the December 2015 confirmation of 407’s ratings.

The Notes have a maturity date of May 4, 2027, and rank pari passu with all other senior obligations of the Company. As a result, the “A” rating and Stable trend are consistent with the ratings and trend currently assigned to 407’s senior debts.

As measured by vehicle kilometres travelled (VKT), traffic volumes continued to grow in 2015, up by 3.3%, while average workday trips and average trip length increased by 2.1% and 0.7%, respectively. Along with higher toll rates, the traffic growth led to a 12.9% increase in revenue. Operating expenses increased by 6.8%. This led to EBITDA growth of 14.2% to $840.0 million. The senior debt service coverage ratio (DSCR), including shadow amortization, was 2.3 times (x) while junior and senior interest coverage was 2.7x, in excess of the 1.7x and 2.0x targets, respectively, agreed upon with DBRS at the current rating level. The Company was not required to make any congestion payments in 2015.

Traffic growth continued in the first nine months of 2016 with VKT up by 4.5% and average workday trips and average trip length both increasing by 1.7% compared with the corresponding period in the previous year. No congestion payments are expected to be incurred in 2016. For the full year, the Company expects that traffic growth and toll increases would lead to revenue increases of 11.1% while operating expenses are expected to decrease by 6.1%, leading to forecasted EBITDA growth of 14.5%.

The Company upsized its credit facilities in December 2015 to $1.0 billion from $500.0 million and, as at September 30, 2016, its credit facilities were drawn to $408.0 million. The Company anticipates using approximately $628.0 million by the end of the year, approaching the $700.0 million mark by early 2017 with $300.0 million left undrawn. The Company expects to pay down draws on the credit facility with future capital markets issuance and to gradually increase its leverage by up to $500.0 million per year. Because of 407’s full utilization of its non-capital tax losses, 2015 marks the first year in which the Company will pay current income taxes. Current income tax expense amounted to $48.6 million for the first nine months of 2016 compared with $0 in the same period in 2015. After incorporation of the effects of the additional debt and income taxes, the cash-based senior DSCR with shadow amortization is 2.1x as at Q3 2016 whereas the cash-based senior and junior DSCR is at 2.7x, both continuing to support the rating. Along with its plan to gradually increase leverage, 407 still expects to maintain the senior indenture DSCRs and the senior and junior cash DSCR (net of cash income taxes) well above 1.7x and 2.0x, respectively.

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.

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

The rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.

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