DBRS Confirms Pearson International Fuel Facilities Corp. at A (low)

DBRS has today confirmed the rating on the Amortizing Bonds of Pearson International Fuel Facilities Corporation (PIFFC or the Company) at A (low), with a Stable trend. For the fiscal year ended June 30, 2009, fuel volumes declined 6.0%, comparable to the 6.1% decline which had been forecast and reflective of the downturn in aircraft movements at the Lester B. Pearson International Airport (Pearson). While aircraft movements were higher than budgeted, the airlines continued their strategic shift to higher load factors and employing smaller, more fuel efficient aircraft, and ultimately fuel deliveries were not meaningfully impacted. While PIFFC recorded a large increase in recurring EBITDA (up 10% due to higher recoveries from airlines), it swung to a recurring net loss of $3.3 million as a result of higher amortization costs and higher net interest costs. PIFFC’s membership at the end of FY2009 totalled 31 airlines, as Martinair left the consortium and Northwest and Delta Airlines combined their memberships, while no new members joined. The Debt Service Coverage Ratio (DSCR) declined to 1.06 times at the end of FY2009 from 1.31 times at the end of FY2008 as the Company shifted its focus to managing to a 1.0 time DSCR.

In 2009, PIFFC brought its 40-million litre rail offload storage facility into service, which increases its storage capacity to 57 million litres and allows for better fuel supply flexibility for airlines.

In March 2009, PIFFC replaced its $5 million credit facility with a $25 million committed credit facility provided by a syndicate of Canadian banks. Of the $25 million, $5 million (Tranche A) can be used for general operating and maintenance expenses while the balance (Tranche B) may only be used for financing capital expenditures. As of December 31, 2009, there was $10.8 million drawn on Tranche B and no drawings on Tranche A.

Looking forward, results are expected to continue to hover close to, but above, break-even levels. PIFFC is forecasting fuel volumes to decrease by 0.7% for FY2010, in contrast to member volumes which declined 1.8% over the first six months of FY2010.

PIFFC intends to make use of its credit facility to finance near-term capital needs and predicts that its DSCR will stabilize close to (but above) 1.0 time, in accordance with its rate-setting practices. This is well below the 1.3 times which had previously been expected by DBRS, and could negatively impact the Company’s financial flexibility and ability to respond to unexpected shocks, particularly as draws under its credit facility further diminish liquidity.

DBRS notes that a 1.0 time DSCR is low for the rating category and below other airport-related infrastructure credits. While failure to meet a 1.0 time DSCR (including principal and interest of both the bonds and credit facility) on an historical basis is not a default under its trust indenture, any inability to do so could be viewed by DBRS as inconsistent with an A (low) rating, and could place downward rating pressure upon the credit. Furthermore, DBRS expects that the Company will refinance its credit facility at some point in the future by way of additional Master Trust Indenture (MTI) debt, which would place further downward pressure on its DSCR metric (which per the MTI excludes interest and principal repayments on the credit facility from the calculations). The ability to increase fees without notice helps to offset relatively low coverage ratios, while tight collection practices, two-month prepayment of user fees and the mechanism under the Interline Agreement allowing PIFFC to recover bad debt from active members will continue to assist in mitigating airline credit risk. The contractual structure also remains supportive, securing PIFFC’s exclusive rights over fuelling services at Canada’s busiest airport until 2032.

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

DBRS ratings on PIFFC and other airport-related infrastructure providers are based upon their respective contractual frameworks, the strength of the airport served, the operating track record of the issuer and the affordability of their debt burden.

This is a Corporate (Public Finance) rating.