DBRS Confirms Strait Crossing Development Inc.’s 6.17% Revenue Bonds at BBB (low), Stable Trend

DBRS Limited (DBRS) confirmed the rating on Strait Crossing Development Inc.’s (SCDI or the Company) 6.17% Revenue Bonds at BBB (low) with a Stable trend. This confirmation is primarily based on improved traffic fundamentals, continued good expense management, ongoing debt reduction and improved financial metrics, but tempered with the contemplation by the Company of a $5 million reduction in the General Reserve Account (GRA), which is permitted if certain conditions are met under the Master Trust Indenture (MTI). These conditions were satisfied as at September 30, 2017, but the Company decided to postpone taking any action at this time. DBRS views the contemplated reduction as supportable at the current rating, provided financial metrics remain close to present levels. Assuming the conditions continue to be met, SCDI will have the opportunity every March and September to remove funds from the GRA.

Traffic has been on a rising trajectory, leading to 2016 volumes (837,755 vehicles) that surpassed budget by 12% and increased year over year (YOY) by 9.2%. This is partly attributable to the temporary reduction of service capacity of the Wood Islands ferry in 2016. As per Statistics Canada, Prince Edward Island’s gross domestic product increased by 2.4% in 2016, becoming the third-fastest-growing province. A modest $0.50 toll increase (for two-axle vehicles) and good cost management continue to support revenues and earnings before interest, taxes, depreciation and amortization (EBITDA), which rose 13.7% YOY compared with 2015. Tightly controlled expenditures combined with revenue growth resulted in a debt service coverage ratio (DSCR), as calculated by DBRS, of 1.35 times (x) for F2016, compared to 1.20x for 2015. For F2016, SCDI reported a DSCR, as defined in the MTI, of 1.24x, which is an improvement over the F2015 DSCR of 1.14x. Despite the return to normal ferry operations in 2017, the year-to-date (as of September 30, 2017) traffic at the bridge continued to outperform, with volume of 690,159 vehicles, which exceeded budget by 9.4% and surpassed prior-year volumes by 3.1%. Corresponding toll revenues were 8.6% ahead of budget and 4.7% higher compared with the prior-year period. For the period ending September 30, 2017, debt fell to $254.3 million, and SCDI reported DSCR of 1.31x.

Notwithstanding the strengthening Canadian dollar and recent higher fuel prices, and given the strong interim results, the Company expects 2017 bridge traffic to be the highest in its operating history. The performance of the bridge structure continues to exceed expectations, which has helped keep capital expenditures low and very predictable.

DBRS expects that, barring any unforeseen material changes to current economic conditions, SCDI will continue to report stable or improving traffic and financial metrics that are consistent with the current ratings. Over time, if sustainable DSCRs exceeding 1.5x are achieved, there could be a positive rating action. While currently viewed as being of low probability, the following factors could lead to a negative change in the credit rating: significant decline in traffic or change in traffic mix such that revenues fall materially; incurrence of large unexpected maintenance or rehabilitation items; and DSCR, as calculated by DBRS, deteriorating to 1.10x or lower. DBRS also notes that if the GRA balance were to decline significantly, any potential rating upside associated with improving financial performance could be pushed further into the future. Absent financial performance improvement, a materially lower GRA balance could put negative pressure on 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.

The principal methodology is Rating Public-Private Partnerships (March 2017), which can be found on dbrs.com under Methodologies.

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

DBRS will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving this report, contact us at info@dbrs.com.