DBRS Confirms Ratings on 407 International Inc.

DBRS Limited (DBRS) has today confirmed the Senior Bonds rating of 407 International Inc. (407 or the Company) at “A” as well as its Junior Bonds rating at A (low) and Subordinated Bonds rating at BBB. All trends are Stable, supported by the solid long-term economic fundamentals of the catchment area, sound cash flow generation and good operating efficiency, but tempered by the Company’s sizable debt burden and 407’s leverage intentions going forward.

As measured by vehicle kilometres travelled (VKT), traffic volumes continued to grow in 2014, up by 3.4%, while average workday trips and average trip length increased by 2.7% and 0.5%, respectively, slightly better than the Company’s expectations. Along with higher toll rates, the traffic growth led to a 10.8% increase in revenue. Operating expenses increased by 11.4%, attributable to higher 407 East contract expenses, increased billing and collections costs, partially offset by non-recurring items recorded in 2013. This lead to EBITDA growth of 10.7%, to $735.7 million. The senior debt service coverage ratio (DSCR), including shadow amortization as per the Master Trust Indenture definition, was 2.0 times (x) while junior and senior interest coverage was 2.4x, in excess of the 1.7x and 2.0x targets, respectively, agreed upon with DBRS at the current rating level. The Company was not required to make any congestion payments in 2014.

Traffic continued growing in the first nine months of 2015 with VKT up by 3.4% and average workday trips and average trip length increasing by 2.2% and 0.6%, respectively, slightly ahead of expectations. No congestion payments are expected to be incurred in 2015. For the full year, traffic growth and toll increases are expected to lead to revenue increases of 13.0%, while operating expenses are expected to increase by 8.9%, with forecasted EBITDA growth of 13.0%.

Year to date, 407 has incurred $266.8 million of additional debt on a net basis. The Company recently upsized its credit facilities by an additional $500.0 million to $1.0 billion and its credit facilities were drawn to $500.0 million. For the remainder of the year, it intends to draw down an additional $80.0 million under its credit facilities and use up to $120.0 million of the increased availability to pay a dividend in 2016. As such, the increased issuance of $346.8 million in additional debt is slightly below leverage expectations. The Company expects to pay down draws on the credit facility with capital markets issuance in future. After incorporation of the effects of the additional debt, the senior DSCR with shadow amortization is expected to be 2.3x at year end whereas the senior and junior DSCR is forecast at 2.7x, both continuing to be supportive of the rating. DBRS notes, however, that the size of the facility allows for significant debt to be incurred without a rating affirmation and DBRS will continue to monitor leverage levels accordingly.

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 website under Methodologies.

The full report providing additional analytical detail is available by clicking on the link under Related Research at the right of the screen or by contacting us at info@dbrs.com.