DBRS Morningstar Confirms British Columbia Ferry Services Inc. Ratings at A (high), Stable Trend

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating and the Senior Secured Bonds rating of British Columbia Ferry Services Inc. (BC Ferries or the Company) at A (high) with a Stable trend. The confirmations are backed by notable traffic volume recoveries, a stable debt level, and the proven support of the Province of British Columbia (the Province; rated AA (high) with a Stable trend by DBRS Morningstar), as well as the operating resilience and reliable management demonstrated by the Company, having weathered challenging conditions during the Coronavirus Disease (COVID-19) pandemic while maintaining satisfactory financial metrics.

The coronavirus pandemic, which began in March 2020, caused vehicle and passenger traffic volumes to drop significantly in F2021, and they stood at 25% and 41%, respectively, below the F2019 levels. However, boosted by the $186 million recognized revenue from the Provincial Safe Restart Funding, total revenues dropped only by 10.8%. Total expenses decreased by approximately 14.0%, partially offsetting the lost revenue and leading to a 2.3% decline in EBITDA. This, combined with lower scheduled loan repayments, led to a debt service coverage ratio (DSCR) of 3.0 times (x) in F2021, slightly better than expected.

After the Province lifted travel restrictions in June 2021 for nonessential travel between regional zones, material traffic volume recoveries were observed during Q2 F2022. Vehicle and passenger volumes in H1 F2022 (the six-month period ended September 30, 2021) reached 90% and 75%, respectively, of the 2019 levels. During H1 F2022, total revenues (excluding the Safe Restart Funding) and operation and maintenance expenses went up by 28.0% and 22.5%, respectively, leading to a 43.0% increase in EBITDA compared with the same period in the prior year. As of September 30, 2021, BC Ferries reported a trailing 12-month DSCR at 4.35x. While the Temporary Service Level Adjustment Agreements have expired, the service levels of BC Ferries have reverted back to normal. The Company expects to recognize $101 million in revenue from the Safe Restart Funding during F2022.

DBRS Morningstar currently assumes that the annual passenger volume will gradually recover at 78%, 90%, and 94% of the pre-crisis level in F022, F2023, and F2024, respectively, under which scenario DBRS Morningstar expects the Company's DSCR to remain above 2.5x during the remainder of Performance Term 5, supportive of the ratings. The prompt and meaningful government supports observed to date have strengthened DBRS Morningstar's view of the essentiality of the services provided by BC Ferries. While DBRS Morningstar considers a further positive rating action to be unlikely at this time, the ratings can now withstand negative financial impacts to a larger extent compared with DBRS Morningstar's view at the onset of the coronavirus pandemic. Material and negative deviations from DBRS Morningstar's base-case assumptions (as further detailed on page six of the rating report) could still have a negative rating impact.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

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

The principal methodology is Rating Public-Private Partnerships (August 19, 2021; https://www.dbrsmorningstar.com/research/383244), which can be found on dbrsmorningstar.com under Methodologies & Criteria. Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021; https://www.dbrsmorningstar.com/research/373262).

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.

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