DBRS Comments on 407 International’s Leverage Intentions

DBRS notes today that in its latest quarterly Management’s Discussion and Analysis, 407 International Inc. (the 407 or the Company) comments that it expects to increase leverage as a result of its improving financial performance, while also indicating that it is committed to maintaining current ratings levels and expects to maintain healthy credit metrics.

Discussions with the Company have indicated that it intends to gradually increase leverage over the next three to five years by way of bullet bonds of staggered maturities, while maintaining a cash-based senior and junior debt service coverage ratio (DSCR) above 2.00 times and a senior DSCR, including shadow amortization as per its Master Trust Indenture, above 1.70 times. The 407 also intends to keep minimum cash balances of three months of budgeted cash annual operating expenses (excluding provision for doubtful accounts) and 3% of budgeted annual revenues on hand. Cash balances in excess of such amounts would be paid as dividends, if permitted by the trust indenture. As such, while the 407 has in the past raised debt in excess of its capital expenditure needs while making use of cash balances for shareholder dividends, going forward the Company could potentially increase leverage at a faster pace.

The added clarity signals the relationship between gearing and dividend policy that the Company intends to pursue in the future. DBRS believes that the 407’s leverage intentions would not have a ratings impact upon its debt ratings, provided that the Company manages its dividend payouts and debt levels in accordance with the prevailing economic outlook and with its current operating conditions in mind. In order to maintain current rating levels, DBRS expects that the Company would continue to possess an ability to absorb unexpected traffic or revenue downturns or unanticipated increases in financing costs without breaching targeted DSCR levels.

Notes:
The applicable methodology is Rating Canadian Public-Private Partnerships (December 2011), which can be found on our website under Methodologies.