DBRS Confirms New Brunswick (F-M) Project Company Inc.’s Highway Bonds at A (high) and Toll-Based Debt at “A”

DBRS has today confirmed the rating on the Highway Bonds of New Brunswick (F-M) Project Company Inc. (the Company) at A (high) and the “A” ratings of Tranche A and Tranche B Senior Toll-Based Debt. All trends are Stable.

The rating of the Highway Bonds is a flow-through of the long-term rating of the Province of New Brunswick. Principal and interest of the Highway Bonds are serviced by an absolute assignment of a portion of the sublease payments of New Brunswick Highway Corporation (NBHC), a provincial Crown corporation. As of June 30, 2011, $623.8 million of Highway Bonds remained outstanding. The Highway Bonds will mature on November 30, 2027.

The rating on the Senior Toll-Based Debt is reflective of the business fundamentals of the Highway, supported by good historical traffic growth and inflation-linked shadow tolls, which continue to generate debt service coverage levels well in excess of those expected at the time of the original debt issuance. The Senior Toll-Based Debt also has an absolute assignment of a portion of the sublease payments, but in contrast to the Highway Bonds the payment of debt service on the Senior Toll-Based Debt is volume-dependent, reflected in the one notch of differentiation between the two at present. In 2010, traffic grew 3.3% over 2009 as 4% growth in large vehicles led 3.1% growth in passenger vehicles.

Tolls are adjusted annually using the New Brunswick Consumer Price Index (NBCPI) as a benchmark and were decreased by 0.4% for 2010. However, DBRS notes that the toll reduction was an oversight, as the concession agreement specifies that no toll adjustments are made in cases of deflationary NBCPI. Given the robust debt service coverage level and that in any case excess toll revenues are paid back to NBHC, no retroactive adjustment was deemed necessary and the debt service coverage ratio (DSCR) for 2010 was roughly in line with 2009, at 2.7 times.

For the first eight months of the year, traffic has declined 2.4% year-over-year, likely caused by high gasoline prices, slowing economic activity and fewer American travellers as a result of the high Canadian dollar. An annual toll increase of 1.2% has partially offset the effects of the traffic decrease and for the period, traffic volume payments are down 0.6%, leading to a DSCR of about 2.9 times, nearly in line with the first eight months of 2010 and remaining strong for the rating. Consensus forecasts for New Brunswick are for modest GDP growth, although economic headwinds may continue to pressure traffic levels.

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.