DBRS Downgrades Strait Crossing Development Inc. on Renewed Traffic Weakness

DBRS has today downgraded the rating on Strait Crossing Development Inc.’s (SCDI or the Company) Revenue Bonds to BBB (low) from BBB. The trend is now Stable. Despite management’s sustained focus on cost containment and modest improvement in financial metrics in 2010, traffic is facing renewed downward pressure this year which, combined with the accretive nature of the bonds, points to the likely continuation of a depressed debt service coverage ratio (DSCR) and hindered financial flexibility.

Due to slightly negative inflation in the region the prior year, the Company was prevented from raising its tolls in 2010. Nonetheless, sound traffic growth of 2.6% and tight expenditure management helped drive EBITDA up 4.5%, which more than offset the steady increase in debt servicing and allowed the DSCR to rebound modestly to 1.13 times (1.10 times as per the indenture). When the 2011 budget was developed last fall, the Company anticipated traffic growth of 1.75% for personal vehicles and 1% for trucks. Combined with a $0.75 toll increase implemented in January 2011, higher traffic was to continue to drive improvement in the DSCR. Unfortunately, the traffic outlook has deteriorated notably since then, as poor weather conditions, the strong Canadian dollar and high gas prices have led to traffic volumes 2.9% below projections for the first half of the year and down 1.1% relative to the same period a year ago. Absent a marked rebound in volume this fall, EBITDA will end the year lower, holding the DSCR back to around 1.10 times.

The Company is hopeful that more normal weather and tourism conditions and moderate toll increases will be conducive to a rebound in results in 2012. In addition, maintenance requirements remain relatively low and predictable, with most of the costs of the next major intervention in 2013 already funded in the major maintenance reserve. Nevertheless, the ongoing economic recovery remains fragile, as reflected in the downward revisions seen in the growth projections for Canada in recent months, while high fuel prices will likely continue to dampen traffic. As a result, the chance of a marked recovery in the DSCR over a year or two seems fairly modest. More importantly, the rigid toll-setting framework, accretive debt amortization schedule and already low DSCR provide limited flexibility to withstand an extended period of sluggish traffic conditions, although the Debt Service Reserve Account and the General Revenue Account continue to hold considerable liquidity sufficient to cover nearly two years of debt servicing.

Note:
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.