DBRS Finalizes Provisional Ratings of Blackbird Infrastructure 407 General Partnership

DBRS Limited (DBRS) has today finalized its provisional ratings of A (low) with a Stable trend assigned to the $108.0 million Senior Long-Term Amortizing Bonds (Series A Bonds) and the $264.3 million Senior Short-Term Bullet Bonds (Series B Bonds) of Blackbird Infrastructure 407 General Partnership (ProjectCo), the special-purpose entity created to design, build, finance, maintain and perform lifecycle obligations of the Highway 407 Phase 2 east extension (the Project) under a 32.8-year project agreement (PA) with the Province of Ontario (the Province). The rating is supported by the availability-based revenues from the Province, the construction contract, which passes down nearly all of ProjectCo’s construction period risks on a date-certain, fixed-price basis, and the pass-down of all service period obligations, including lifecycle and handback risk, to an experienced Service Provider.

The project entails the construction of 88.4 lane kilometers (km) of a tolled, controlled access highway, which will extend Highway 407 by 21.1 km from Harmony Road in Oshawa to Highway 35/115, and features construction of the 10.1 km East Durham Link connecting the Phase 2 extension to Highway 401. DBRS considers the construction task to be of low to moderate complexity, with a scope of work that is similar to other civil transportation projects. The Construction Contractor is a general partnership comprising Ferrovial Agroman Canada Inc. and Holcim (Canada), Inc. (collectively, the Construction Contractor). The Construction Contractor’s obligations under the $722.0 million construction contract are supported by a letter of credit (LC) equalling 10% of the contract price and a limit of liability of 40% of the contract price, backed by a parent company guarantee from Ferrovial, S.A. Construction is expected to take 4.8 years. DBRS notes that there is a pass-down of virtually all construction phase obligations. The underlying creditworthiness of the Construction Contractor guarantor and performance security package are supportive of the rating of the bonds.

The contractual framework of the transaction is similar to other PPP projects rated by DBRS, although the project features two substantial completion dates. However, DBRS does not view this as adding risk to the transaction.

Upon achieving the first substantial completion date, expected on December 31, 2017, the 30-year service phase will commence. ProjectCo’s operations, maintenance and rehabilitation (OMR) obligations during the service phase will be passed down to a joint venture consisting of subsidiaries of Cintra Infraestructuras Internacional, S.L. and Holcim (Canada) Inc. (collectively, the OMR Contractor). The OMR Contractor’s responsibilities include routine maintenance, winter maintenance and life-cycle maintenance. The OMR Contractor’s obligations will be supported by a 200% limit of liability at termination backed by parent guarantees and an LC equal to 50% of the annual OMR payments, indexed. DBRS notes that an LC of $1.4 million will be available at financial close to back the OMR provider’s obligations during construction.

The Province will make a lump-sum payment of $172.6 million at substantial completion of Phase 2a, and $561.0 million at substantial completion of Phase 2b, a portion of which will be used to retire the senior short-term bank facility and fully redeem the Series B Bonds. The balance of funding for the Project will come from the Series A Bonds and from an equity contribution of $31.4 million (with an additional $14.8 million of contingent equity), representing 7.0% of private capital at financial close, which will be supported by an LC until contributed. The minimum historical debt service coverage ratio (DSCR) of 1.39 times, whereas the equity lock-up DSCR is 1.15 times. ProjectCo’s financial projections feature resiliencies of 44.8% for the operations and maintenance budget and 25.3% for the rehabilitation budget, which are supportive of the rating.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

The applicable methodology is Rating Public-Private Partnerships, which can be found on our web site under Methodologies.