DBRS Confirms NAV CANADA at AA/AA (low), Stable Trend

DBRS has today confirmed the ratings on the Senior Debt and General Obligation Debt of NAV CANADA (the Company) at AA and AA (low), respectively. The trend remains Stable. The rating confirmation incorporates the essential nature of the services provided by the Company and the good results achieved last fiscal year, but reflects the softening of traffic experienced during the current fiscal year and the magnitude of NAV CANADA’s pension obligations.

For fiscal year 2011 (F2011), air traffic increased by 4.4%, with positive contributions from each segment driving revenue growth of 4.6%. Operating expenses also increased, but to a lesser degree, leading to an EBITDA increase (before rate stabilization) of nearly 10.0%. Coupled with slightly lower net interest expenses, the debt service coverage ratio (DSCR) increased to 1.8 times for the fiscal year, in line with expectations. For the current fiscal year, traffic growth has lagged expectations, up 0.9% for the first three quarters on a normalized basis. NAV CANADA has revised its estimates for F2012 traffic to be roughly in line with that of F2011, and expects that this will lead to a DSCR of 1.8 times for the current fiscal year.

NAV CANADA estimates traffic growth in the order of 1% in F2013. Given the uncertain global economic climate and volatility caused by sovereign debt concerns, achieving even modest growth could prove challenging. NAV CANADA’s base case traffic forecast for F2013 would lead to a DSCR of approximately 1.8 times. As the rate stabilization account is at its target balance, NAV CANADA does not anticipate implementing a rate increase at this time. The Company also remains focused on cost control and DBRS expects that it will continue to proactively manage its expenses. Notwithstanding, further cost savings could be modest given that the majority of the Company’s expenses are fixed.

The Company’s pension plan, previously in a surplus position on a going concern and solvency basis, swung to a solvency deficit of $925 million at the January 2012 valuation, primarily as a result of lower discount rates and new legislation requiring that market value of assets, rather than the smoothed value of assets, be used for the valuation process. The corresponding statutory solvency deficiency is $509 million. In July 2012, NAV CANADA posted a letter of credit of $102 million to meet the requirements of pension funding legislation which dictate that the statutory solvency deficiency is to be funded over five years. The Company is estimating a continued deficit position on a solvency basis for the next several years and, as long as the plan has a going concern surplus (currently the case), expects to post letters of credit to meet its statutory solvency deficiency funding obligations.

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.