DBRS Assigns Ratings to 407 International Inc.’s New Issues

DBRS Limited (DBRS) assigned a rating of “A” to the $500 million Series 17-A2 Senior Notes issue (the Senior Notes) and a rating of BBB to the $300 million Series 17-D1 Subordinated Bonds issue (the Subordinated Notes) of 407 International Inc. (407 or the Company). Both trends are Stable. The Senior Notes and Subordinated Notes have been issued from 407’s Shelf Prospectus dated December 13, 2016.

DBRS understands that the proceeds from the Senior Notes issuance will be used (1) to repay approximately $235 million owing by the Company to certain Canadian chartered banks under the Company’s senior secured revolving credit facilities, with such amount being used to reduce the maximum amount available under these revolving credit facilities to approximately $765 million; (2) to fund the Series Reserve Account in respect of the Senior Notes; and (3) for general corporate purposes. The proceeds from the Subordinated Notes will be used to repay the Company’s $300 million Series 10-D1 Subordinated Bonds, maturing on November 24, 2017, on maturity or redemption, as applicable.

Upon redemption of the Series 10-D1 Notes, the Company plans to further reduce the maximum amount available under its revolving credit facilities by $300 million and intends to draw up to approximately $465 million under these facilities. Combined with the $250 million Series 17-A1 Senior Notes issued by the Company in March 2017, the issuance of the Senior Notes and the reduction of the credit facilities collectively result in a net increase of senior debt of approximately $515 million during 2017, which is slightly higher than DBRS’s expected increase of up to $500 million for the calendar year.

The Senior Notes have a maturity date of 27 years and rank pari passu with other senior obligations of 407, while the Subordinated Notes have a maturity date of five years and rank pari passu with other subordinated obligations of 407 but are subordinate to the senior and junior obligations of 407.

In H1 2017, total trips increased by 1.4% and average trip length increased by 2.8%, leading to a 4.3% increase in vehicle kilometres travelled. The increase is attributable to the positive impact on traffic on the eastern section of the 407 Express Toll Route (ETR), coupled with longer trips on the 407 ETR resulting from travel on Highway 407 East. Higher tolls and increased patronage contributed to a 14.6% revenue increase in H1 2017, while operating expenses increased by only 12.5%. Correspondingly, EBITDA increased by 15.0% compared with the same period in 2016.

As at December 31, 2016, the senior debt service coverage ratio, including shadow amortization, was 2.4 times (x), while junior and senior interest coverage was 3.0x — slightly improved from the previous year. Factoring in the new debt issuance and permanent reduction of the credit facilities, coverage metrics are still expected to remain comfortably above the 1.7x and 2.0x targets agreed upon with DBRS at the current rating levels.

While not expected, the ratings may be negatively affected should traffic drop significantly for a protracted period of time or if debt increases at a faster pace and tests the above-mentioned target thresholds agreed upon with DBRS. DBRS considers a rating upgrade to be unlikely at this time.

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

The principal methodology is Rating Public-Private Partnerships, which can be found on dbrs.com under Methodologies.

The rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.

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