DBRS Comments on 407 International Inc.’s Amendment to Shelf Prospectus

DBRS notes today that 407 International Inc. (407 or the Company) has filed an amendment to its short-form base shelf prospectus dated November 18, 2009. The effect of the amendment is that holders of new notes to be issued under the Prospectus will not have the benefit of the rating affirmation test described in clause (c) of the first paragraph of the “Capital Markets Platform – Additional Indebtedness Covenant” section of the Prospectus unless specifically provided for in the Pricing Supplement relating to those notes.

The rating affirmation test in the Company’s Master Trust Indenture limits the amount of debt that can be incurred to a level which is consistent with the rating at that time. That said, this amendment in and of itself does not affect DBRS’s current ratings or trends on 407 as there is no meaningful change to the underlying business, financial profile and/or fundamentals of the Company. At the same time, DBRS notes that it is not uncommon for credits within the diverse infrastructure sector not to have a rating affirmation test.

Once debt is issued without a rating affirmation test under the recently amended prospectus, DBRS expects that the Company will continue with this practice on a go-forward basis. If all outstanding debt was without this test, 407 would not be constrained by the capital markets platform from taking on net new debt, which could result in a diminished rating. However, all existing debt with such a covenant would need to come to maturity or be called first. The rating affirmation test remains embedded in all $4.9 billion of 407’s existing debt, the longest maturity of which is 2039, with early redemption involving significant call premiums for the Company. Therefore, DBRS believes that the feature will likely remain a key component of the Company’s capital structure and contribute to rating stability for many years to come. In addition, DBRS notes that lenders continue to benefit from the minimum debt service coverage ratio (DSCR) threshold in 407’s overall additional indebtedness test. Accordingly, new debt is permitted if:

Either: (a) the consultant has certified that net revenues for each of the next five years will be sufficient to provide for a senior DSCR of at least 1.45 times and a junior DSCR (incorporating senior debt servicing) of at least 1.30 times; or (b) the Company has certified that during any consecutive 12-month period in the most recently completed 18-month period, assuming that the additional indebtedness had been issued at the beginning of the period, the senior DSCR adjusted to give effect to the proposed additional indebtedness exceeded 1.35 times and the junior DSCR adjusted similarly exceeded 1.20 times.

This is not as effective as the rating affirmation test at providing stability to the rating, but is likely sufficient for containing leverage in a range that would remain consistent with an investment-grade rating for the senior debt .

Although the amendment to the prospectus has no impact on 407’s ratings, DBRS reiterates that ratings and trends on all of the Company’s debt issues (with or without the rating affirmation test) could be affected by changes in external conditions and/or 407 management decisions if they were to impact the Company’s credit risk profile in a fundamental way going forward.

The amended prospectus of November 18, 2009, allows the Company to issue secured medium-term notes in an aggregate amount of up to $2 billion, of which up to $1.355 billion will be Senior Bonds, up to $180 million Junior Bonds and up to $465 million Subordinated Bonds. Net proceeds from the debt issues are expected to be used to: (i) repay maturing indebtedness; (ii) finance the Company’s general operating, capital and funding requirements; and (iii) fund certain reserves to be maintained pursuant to the Master Trust Indenture and any supplement thereto.

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.