DBRS Limited (DBRS Morningstar) confirmed the AAA ratings with Stable trends on the 2013 Guaranteed Senior Bonds and 2017 Guaranteed Senior Bonds (together, the Bonds), totalling $7.9 billion, issued by Muskrat Falls/Labrador Transmission Assets Funding Trust and Labrador-Island Link Funding Trust (together, the Issuers). The ratings are based on two unconditional and irrevocable federal loan guarantees: the 2013 Federal Loan Guarantee (FLG1) and the 2017 Federal Loan Guarantee (FLG2; together with FLG1, the Guarantee) of substantially similar nature provided by the Government of Canada (Canada or the Guarantor). This rating action follows DBRS Morningstar’s confirmation of Canada’s sovereign rating at AAA with a Stable trend on September 22, 2020 (see DBRS Morningstar’s related press release dated September 22, 2020).
DBRS Morningstar notes that the Guarantee has met its criteria for a flow-through of Canada’s sovereign rating to the Bonds. The Guarantee constitutes an irrevocable, unconditional, absolute, and continuing obligation of Canada. There is no requirement to exhaust recourse against the Issuers before bondholders are entitled to the payment from Canada; all defences are waived by the government and subrogation rights are postponed as long as the guaranteed obligations are still outstanding; and no amendment of the Guarantee is permitted, except by agreement with the Indenture Trustee. Furthermore, release of the Guarantor is permitted only when all its obligations are fully repaid. DBRS Morningstar expects that the Bonds’ rating will continue to move in tandem with Canada’s sovereign rating, irrespective of the performance of the Muskrat Falls Project (the Project). Any rating upgrade or downgrade is expected to follow DBRS Morningstar’s similar rating action on Canada.
The Issuers were created as single-purpose financing trusts to facilitate the financing of the Project, an 824-megawatt hydroelectric power-generating facility, and the development of associated transmission lines in Newfoundland and Labrador (rated A (low) with a Negative trend by DBRS Morningstar). The Issuers’ sole business is to issue the Bonds and on-lend proceeds to the Project via back-to-back loans. The Issuers sized the Bonds to cover interest payment during construction. After the in-service date, debt service will depend on principal and interest received on the back-to-back loans to the Project. The in-service cost (including financing costs) are currently estimated at $13.1 billion, which was updated on September 28, 2020. The construction is essentially complete, and the Project is entering into the commissioning stage. The first power was achieved on September 22, 2020. Nonetheless, the full power is now expected by September 30, 2021, a one-year delay from the prior estimate provided in June 2017.
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.
All figures are in Canadian dollars unless otherwise noted.
The principal methodology is Guarantees and Other Forms of Support (January 22, 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.
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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.
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