DBRS Confirms 407 International Inc. at “A”

DBRS has today confirmed the ratings of 407 International Inc. (the Company or 407), including its Senior Bonds at “A”. All trends are Stable. Despite its heavy debt burden, the Company continues to exhibit sound fundamentals, based on its operational efficiency, solid cash flow generation, sizable reserves and long-term traffic prospects. After declining in 2009, traffic growth rebounded in 2010 and vehicle kilometres travelled (VKT) were up 5.5% year-over-year (yoy). Combined with higher tolls and fewer unbillable accounts, revenues were up a robust 11.5% compared to 2009, to $624 million, while EBITDA grew by 12.6%. Higher debt levels were essentially offset by EBITDA growth, and the debt service coverage ratio (DSCR) per the trust indenture remained relatively flat at 1.8 times.

Despite setting a one-day traffic record on June 30, 2011, VKT for H1 2011 declined by 0.5% as traffic was negatively affected by a severe winter and an unusually wet spring, higher gasoline prices and the earlier-than-expected opening of high occupancy vehicle lanes on the Queen Elizabeth Way (QEW), which particularly impacted traffic on the western portion of the highway. DBRS expects that traffic will be modestly depressed for the full year. Notwithstanding, 407 remains well positioned to weather softening traffic levels, as relatively high toll increases and fewer unbilled accounts should help to grow full year revenues in the range of 5% to 7%. The Company expects to pay out dividends in exceeding operating cash flow and gradually bring down cash balances, but intends to maintain a minimum cash balance of $50 million. A DSCR of approximately 1.9 times is forecast by the Company for 2011.

In 2010, the Company issued its first debt under its amended short-form base shelf prospectus. The effect of the amendment is that holders of new notes 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 remains in place for debt issued prior to 2010 and is viewed by DBRS as adequate protection against excessive leverage. However, once pre-existing debt is paid down or refinanced (2040 at the latest), this may result in a weakening of the credit, depending upon management’s leverage appetite at that time.

In March 2011, 407 disposed of all of its asset-backed commercial paper (ABCP) through market sales and through the exercise of the put option embedded in the Ineligible Long-Term Notes Bank Credit Facility, and concurrently cancelled the associated credit facilities. The Company used the proceeds to pay a special dividend of $110 million on April 14, 2011.

Effective January 1, 2010, the Company adopted IFRS, which has resulted in no material changes to the Company’s financial metrics and only modest changes to its financial statements.

DBRS has also discontinued the ratings assigned to Senior Bonds series 07-A2 and 08-A1 and Subordinated Bonds series 08-D1. The Senior Bonds series 07-A2 were repaid on July 16, 2010, while the Senior Bonds Series 08-A1 and Subordinated Bonds series 08-D1 were repaid December 29, 2010.

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.