DBRS Assigns Rating of AA (low) with a Stable Trend to NAV CANADA’s New Issue

DBRS Limited (DBRS) assigned a rating of AA (low) with a Stable trend to the $250 million Series 2019-1 MTN General Obligation Notes issued by NAV CANADA (NAV or the Company). The debt will have a 31.5-year bullet maturity, pay a fixed-rate interest of 3.209% and will rank pari passu with all other subordinated obligations of the Company. The rating being assigned is based upon the rating on already-outstanding series of General Obligation Notes. It is DBRS’s understanding that the net proceeds from the issuance will be used to repay the Series MTN 2009-1 General Obligation Notes that mature on April 17, 2019.

NAV’s ratings are supported by a solid operating framework, strong traffic conditions and declining debt, although pension deficiencies remain large and significant user fee reductions undertaken in F2017 continue to pressure credit metrics in the near term. Since DBRS last confirmed the Company’s ratings on September 5, 2018, NAV posted a strong performance for the fiscal year ended August 31, 2018 (F2018), with 5.1% growth in traffic volumes and 9.6% increase in revenues. As rates remained unchanged on average during F2018, EBITDA increased to $171 million and, consequently, the debt service coverage ratio (DSCR) improved to 1.7 times (x) in F2018. Total debt declined to $1.5 billion as at F2018 because of decreased rollover of the General Obligation Notes that matured during 2018.

Interim results for the first three months of F2019 ended November 30, 2018 (Q1 2019) indicate some moderation in traffic growth, primarily resulting from a high base effect. Traffic growth was 3.5% during the quarter, slightly below NAV’s F2019 budget of 3.6%. The DSCR for the last 12 months ended Q1 2019 remained stable at 1.7x. As at Q1 2019, the balance of the rate stabilization account (RSA) was $128 million, higher than the target balance of $110 million for F2019. However, the RSA is expected to decline to $93 million at the end of F2019 as a result of higher budgeted operating costs, while rates remain unchanged during the fiscal year. DBRS notes that several years of strong performance and healthy traffic volumes created a large surplus in the RSA, which has been applied toward significant rate reductions in F2017 and the maintenance of steady rates thereafter. Going forward, DBRS expects NAV to maintain a sufficient cushion in the RSA and to manage rates in accordance with traffic levels to avoid material compression in the credit metrics. As such, a negative rating action could result should air traffic volumes weaken significantly, causing a material deterioration in the DSCR. At present, DBRS views a positive rating action as unlikely.

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

The principal methodology is Rating Canadian Airport Authorities, which can be found on dbrs.com under Methodologies & Criteria.

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DBRS Limited
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Toronto, ON M5H 3M7 Canada