DBRS Confirms 407 International Inc. at “A”

DBRS has today confirmed the ratings of 407 International Inc. (the Company or 407). All trends are Stable. Despite a heavy debt burden and weaker traffic in 2011, the Company continues to exhibit sound operating efficiency, solid cash flow generation, sizable reserves and good long-term traffic prospects. After a solid rebound in traffic levels was experienced in 2010, traffic was softer in 2011, and vehicle kilometres travelled (VKT) fell by 0.5% on an annual basis, although average workday trips increased slightly. Weaker traffic was more than offset by toll increases, and combined with fewer unbillable accounts, revenues were up 8.1%, while EBITDA grew 10.7%. Debt levels were modestly higher but more than offset by EBITDA growth, leading to improved debt metrics.

For the first half of 2012, VKTs were up 1.1% as compared to the same period the year prior. DBRS expects that traffic conditions will continue to be subject to economic uncertainty, although toll increases are expected to drive revenues up by 8.7% for 2012.

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, going forward the Company is likely to increase leverage at a faster pace, although DBRS has obtained comfort that the growth in debt will be measured. Year to date, the 407 has issued $400 million of senior debt and has recently filed a preliminary shelf prospectus for up to $1.2 billion of Senior Bonds.

During 2011, 407 disposed of all of its asset-backed commercial paper (ABCP) through market sales and by the exercise of the put option embedded in the Ineligible Long-Term Notes Bank Credit Facility, and concurrently cancelled the associated credit facilities. Proceeds were used to pay a special dividend of $110 million.

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.