DBRS Downgrades NorthwestConnect General Partnership to BBB (high) with a Stable Trend

DBRS Limited (DBRS) downgraded the rating on NorthwestConnect General Partnership’s (ProjectCo) Senior Amortizing Bonds - Series 1 (the Bonds) to BBB (high) from A (low) with the trend remaining Stable. ProjectCo is the special-purpose entity created to design, build, finance, operate and maintain Northwest Anthony Henday Drive (the Project) under a 33.25-year agreement (the DBFO Agreement) with the Government of Alberta (the Province; rated AA (high) with a Negative trend by DBRS).

The rating action stems from the deterioration in the operating and lifecycle resiliencies to 16% and 14%, respectively, based on the updated financial model shared with DBRS. The updated model features a revised lifecycle budget, which is a task that ProjectCo self-performs. The revised budget defers some lifecycle budgeted amounts to later years, resulting in lower cash flows available for debt servicing (CFADS) and dividends to become available in some years in which spending is deferred to. As a result, this negatively impacts both the operating and lifecycle resiliencies, despite the operating and maintenance (O&M) costs being passed down under a fixed-price contract.

The model update is separate and distinct from the review of the lifecycle costs that ProjectCo is considering, which aims to better align budget spending with the actual condition of the asset. The review has no firm completion timeline and the rating action does not consider the potential impact of the review on the financial metrics. DBRS will assess the lifecycle cost profile, Lender’s Technical Advisor (LTA) analysis and the financial metrics when the review is completed.

The Project is in the sixth year of operations, having achieved Traffic Availability on November 1, 2011, and all remaining deficiency items were completed by October 2016. To date, the road has performed well with no material deductions or interruptions to Traffic Availability and there are no outstanding warranty or latent defect items known at this time. During the last 12 months ending August 2017, asset performance was good and deductions, as a result of roadway lighting outages and lane closures to fix roadway lighting, were modest, at approximately $10,000, which comprises only approximately 0.02% of ProjectCo’s revenues.

The relationship between the Province and ProjectCo remains cooperative. ProjectCo has been named in a minor dispute brought on by a landscape subcontractor against the Design-Build joint venture, its partners and others. ProjectCo considers the potential risks arising from this dispute to be limited and ProjectCo to be protected by the indemnity provisions in the construction contract.

For the 12 months ending April 30, 2017, the debt service coverage ratio (DSCR) was 1.15 times (x). The minimum forecast DSCR has reduced marginally to 1.13x from 1.15x at financial close, primarily because of the allocation of the lifecycle underspend to future years and updated indexation. DBRS notes that the metrics are considered to be at the low end of the current rating and continued erosion of credit metrics could result in further negative ratings pressure. DBRS does not expect positive rating action to be likely over the near term.

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.

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.

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