DBRS Downgrades NorthwestConnect General Partnership to A (low), Under Review with Negative Implications

DBRS Limited (DBRS) has today downgraded the Senior Amortizing Bonds – Series 1 (the Bonds) of NorthwestConnect General Partnership (ProjectCo) to A (low) from “A.” Furthermore, DBRS has placed the Bonds Under Review with Negative Implications. ProjectCo is the special-purpose vehicle created to design, build, finance and maintain the northwest portion of the Edmonton Ring Road (the Project).

The rating action stems from the general deterioration in the creditworthiness of some swap counterparties. DBRS has placed the credit Under Review with Negative Implications in order to assess the impact of certain lifecycle expenditures that have been deferred. DBRS believes that this has weakened the overall credit profile of the transaction, as the funds originally earmarked for these expenditures have been distributed, while the debt service coverage ratio (DSCR) has also been eroded in future periods. DBRS intends to conclude its review after a further assessment of ProjectCo’s asset management strategy and an examination of the condition of the asset, balanced against the impact on the forecast financial metrics. Generally, the conditions that lead to the assignment of reviews are resolved within a 90-day period.

Unlike most other public-private partnership (PPP) projects, the financing for ProjectCo involves long-term bank debt and an accompanying swap. Since the swap was put in place, there has been a downward migration in the long-term ratings of two of the three counterparties: Dexia Credit Local and Depfa Bank Plc New York Branch. In accordance with the DBRS PPP rating methodology, the creditworthiness of the financial counterparties is expected to be notably higher than the rating of the project, although to date, the swap providers have fully met their commitments, and the related swaps are “in the money” from the lenders’ perspective. While the methodology allows for some downward migration in the credit profile of the various types of financing counterparties, the deferral of lifecycle costs and the erosion of the overall equity cushion weakens the ability of the financial model to absorb potential future interest rate shocks in the scenario where one of the swap providers defaults on its obligations. DBRS notes that should the swap become “out of the money” or the creditworthiness of the swap counterparties continues to deteriorate, any resulting incremental credit risk exposure could lead to further negative rating action.

ProjectCo has indicated that the condition of the asset permitted the deferral of scheduled lifecycle works, resulting in a change to the lifecycle spending profile over the life of the asset rather than a permanent reduction of cumulative budgeted lifecycle costs. Although operating and maintenance and lifecycle resiliencies have remained relatively unchanged from those envisioned at financial close, distributions have occurred ahead of the originally scheduled timing, partially eroding the project’s cushion to absorb future shocks across the life of the project. At the end of 2015, cumulative equity distributions were in advance of those originally planned. Furthermore, projected DSCRs have also been eroded in some periods to approximately 1.13 times (x), as calculated by DBRS, from a 1.15x DSCR at financial close. In the event that the financial metrics are restored and there are no material impacts to the deferral of the lifecycle expenditures, DBRS may conclude its review without further negative rating action. However, any degradation in the forecast financial metrics as compared with the financial close financial model or degradation of the Project’s condition as determined by DBRS could lead to the review being concluded with further negative rating action.

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

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.

For more information on this credit or on the industry, visit www.dbrs.com or contact us at info@dbrs.com.