DBRS Confirms Strait Crossing Development Inc.

DBRS has today confirmed the rating on Strait Crossing Development Inc.’s (SCDI or the Company) 6.17% Revenue Bonds at BBB (low) with a Stable trend. Following a soft year, traffic started gaining some strength in 2012. However, the recovery is proving to be uneven and traffic conditions are believed to have cooled down in the last three months. As such, despite an improvement in the debt service coverage ratio (DSCR) over the last two years, the ratio remains low and it is unclear whether the Company will be able to continue to rebuild flexibility in its coverage ratio amid fragile economic conditions and accretive debt servicing.

Poor weather conditions, a strong Canadian dollar and high gas prices led to a 0.8% decline in traffic in 2011, ending two consecutive years of solid gains. EBITDA still posted a 2.4% increase due to higher tolls and a sustained focus on costs management, allowing for a modest improvement in the DSCR to 1.15 times. For 2012, the Company’s traffic outlook calls for annual growth of 1.75% for personal vehicles and 1% for truck traffic. This was markedly exceeded during the first half of the year, as traffic was up a solid 5.1% relative to the same period a year ago. However, the trend is believed to have weakened since then, owing in part to slowing government capital projects, volatile consumer confidence and the impact of the strong Canadian dollar on tourism. A $1.00 toll increase implemented on January 1, 2012, and continued tight spending discipline should still allow for modest growth in EBITDA sufficient to maintain, if not slightly improve, the DSCR.

The continued good performance of the structure of the Confederation Bridge (the Bridge) has allowed management to defer major resurfacing work by another two years to 2014. This is consistent with the results of the last independent engineer review completed in May, which confirmed that the Bridge is in good condition. As such, maintenance needs should remain low for the foreseeable future while reserve funds are sufficient to cover nearly two years of debt servicing, providing reasonable resilience to the Company despite a rigid toll-setting framework.

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.