DBRS Changes Trend on Strait Crossing Development Inc. to Negative from Stable

DBRS has today changed the trend on the BBB rating of Strait Crossing Development Inc. (SCDI or the Company) to Negative from Stable. The rating action comes as a result of the rapid weakening in traffic conditions over the last year triggered by the recession and volatile fuel prices, which has revealed lower-than-expected resilience in the traffic base. This has eroded the already limited financial flexibility of the Company, and reduced the debt service coverage ratio (DSCR) to the lower threshold for the current rating. The downturn is compounded by SCDI’s constrained rate-setting autonomy, high proportion of fixed costs and accretive debt servicing requirements, which, despite management’s prudent spending discipline, leave the Company with limited ability to address significant traffic loss. Furthermore, traffic prospects remain subject to heightened uncertainty owing to weakened economic fundamentals and, as a result, there is a potential for further softening in SCDI’s financial metrics.

The year 2008 marked the largest annual traffic decline on record for the Confederation Bridge (the Bridge), at 4.4%, including a loss of 9.1% in the third quarter. Revenues fell by a notable 2.7%, which, combined with a fall in investment income and a rise in spending, squeezed EBITDA by 5.0%. This, in turn, had a considerable impact on the DSCR, which shrank to a tight 1.10 times from 1.17 times in 2007.

SCDI has budgeted for improved financial results in 2009, based on 2.6% higher toll rates and a traffic increase of 2% for leisure travel and 0% for commercial traffic. However, the conservative traffic assumption may be missed again, as economic conditions remain weak and year-to-date traffic growth has been just slightly positive. In Q2 2009, the Bridge did experience traffic growth of 2.3% – its first quarter of growth since Q3 2007 – but it will be the important third quarter (roughly 40% of annual traffic) that will provide a significant indication as to whether traffic is stabilizing.

Despite the cyclical downturn, the outlook for SCDI remains supported over the long term by the Bridge’s status as the only fixed link between Prince Edward Island and the Canadian mainland, as well as the significant time savings provided to users relative to competing ferry transportation. Protection from adverse financial events is also provided by the Company’s sizeable reserve accounts, which combined cover roughly 24 months of debt payments. In addition, management has exhibited prudent control over spending and is expected to maintain this discipline. Nevertheless, many years of below-budget traffic and revenue growth have prevented the accumulation of sufficient financial flexibility to buffer a significant or protracted economic downturn, especially in light of the lack of discretionary means of boosting revenue. The pace at which traffic has weakened in the past year has been somewhat surprising, and has placed the Company on the threshold of what DBRS views as adequate financial flexibility for a BBB rating. Further erosion of the DSCR will likely lead to a downgrade.

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

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

This is a Corporate (Public Finance) rating.