DBRS Morningstar Confirms Strait Crossing Development Inc. at BBB (low) with Negative Trends

DBRS Limited (DBRS Morningstar) confirmed Strait Crossing Development Inc.’s (SCDI or the Company) Issuer Rating and its 6.17% Revenue Bonds rating at BBB (low) with Negative trends. The Negative trends were assigned on May 20, 2020, as a result of the expected Coronavirus Disease (COVID-19)-related impact on the bridge traffic volumes.

In 2019, traffic growth was moderately high with a volume of 887,882 vehicles and slightly exceeded budget by 1.9%. As per Statistics Canada, the Province of Prince Edward Island’s (rated “A” with a Stable trend by DBRS Morningstar) GDP increased by 5.1% in 2019, the highest growth among all Canadian provinces, while GDP rose by 1.7% across Canada over the same period. A $0.75 toll increase for two-axle vehicles and good cost management continue to support revenues and EBITDA, which rose by 4.5% in 2019 compared with 2018. Tightly controlled expenditures and revenue growth resulted in a DBRS Morningstar-calculated debt service coverage ratio (DSCR) of 1.44 times (x) for F2019 compared with 1.40x for F2018. SCDI reported a F2019 DSCR, as defined in the Master Trust Indenture, of 1.37x, which is a slight improvement over the F2018 DSCR of 1.35x.

With the global spread of the coronavirus and the subsequent implementation of containment measures by the Government of Prince of Edward Island and the Government of New Brunswick in March 2020, the traffic on the bridge was reduced to essential services. As a result, the total traffic volumes for Q2 2020 saw a severe decline to 52,494 vehicles, which was 73.7% lower than the same period in the previous year. Following certain easements in restrictions, including the Atlantic Travel Bubble, resulted in some recovery in traffic volumes with the year-to-date September 2020 traffic volumes at 384,279 vehicles, which is 45.6% lower than the same period last year.

DBRS Morningstar now expects the traffic volume recovery to be slow and gradual, with the traffic volumes returning to 2019 levels by 2023. The traffic impact of the coronavirus pandemic will likely materially deteriorate the DBRS Morningstar-calculated DSCR in the shorter term, and DBRS Morningstar expects the DSCR to return back to BBB-range financial metrics by June 2022. The near-term traffic volume challenges and expectation of deteriorated levels of DSCR in the shorter term are partly mitigated by the healthy cash reserve balance, including the general revenue account and fully funded six-month debt service reserve account. DBRS Morningstar will monitor the Company closely and will revisit its analysis if the underpinning assumptions have become materially different.

At this time, DBRS Morningstar does not believe a positive rating action is likely in the short term. DBRS Morningstar continues to monitor the coronavirus-related situation closely and believes that a prolonged impact of the pandemic on the Company’s business and financial profile could put further negative pressure on the Company’s credit rating. In addition, a materially lower General Revenue Account balance or incurrence of large unexpected maintenance or rehabilitation items could also put negative pressure on the ratings. DBRS Morningstar will consider changing the trend on the Company’s rating to Stable upon meaningful traffic recovery and the DSCR returning to BBB-range metrics.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

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

The principal methodology is Rating Public-Private Partnerships (August 19, 2020), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

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 under Related Documents or by contacting us at info@dbrsmorningstar.com.

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

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.

The full report providing additional analytical detail is available by clicking on the link under Related Documents below or by contacting us at info@dbrsmorningstar.com.

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

DBRS Limited
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577