DBRS Morningstar Downgrades Issuer Rating of Strait Crossing Development Inc., Confirms Rating of 6.17% Revenue Bonds, and Changes Trend to Stable from Negative

DBRS Limited (DBRS Morningstar) downgraded Strait Crossing Development Inc.’s (SCDI or the Company) Issuer Rating to BB (high) with a Stable trend from BBB (low) with a Negative trend and confirmed the rating of the 6.17% Revenue Bonds rating at BBB (low), changing the trend to Stable from Negative. The Issuer rating downgrade reflects a prolonged period of pressured financial metrics, including debt service coverage ratios (DSCRs) well below the BBB range, and an extended period of a reduced amount of General Revenue Account funds available, caused by an essentially one-year delay in recovery, compared with expectations in 2020. The confirmation of the rating of the Revenue Bonds at BBB (low) reflects the Issuer rating of BB (high) combined with DBRS Morningstar’s assessment of the likelihood of full recovery of outstanding debt principal in a case of bond default. The previous Negative trends were assigned on May 20, 2020, as a result of the Coronavirus Disease (COVID-19)-related impact on the bridge traffic volumes. This resulted in an outlook of a short-term period of depressed DSCRs mitigated by an expectation of healthy cash reserve balance at the time to cushion this negative effect. DBRS Morningstar now views this previous Negative trend to be resolved with the downgrade of the Issuer rating.

The pandemic and the resulting implementation of containment measures by the Government of Prince Edward Island and the Government of New Brunswick significantly affected 2020 traffic. Traffic in the initial periods of the pandemic was reduced to essential services only, and full-year traffic volumes for 2020 were only 56% of those of 2019, resulting in a revenue decline of almost 40% from the previous year. However, DBRS Morningstar notes that traffic gradually and consistently improved from a pandemic first-wave low through the year, and that volumes over the summer high season months were good, reflecting increasing confidence and activity among travelers. Traffic volumes for 2021 to date have exhibited a similar pattern, with second- and third-wave lockdowns having an outsized effect on the first half of the year and negating the improvements seen in the second half of 2020. Also, improved pandemic conditions and general confidence led to the summer peak season being significantly better than winter and spring, with 2021 summer traffic rising to approximately 70% of pre-pandemic volumes. DBRS Morningstar believes this pattern of good summer results points to continuing demand for tourism services and an eventual recovery to normalized demand once the pandemic finally recedes.

Despite a number of positive developments, including high vaccination rates, the reopening of the U.S.-Canada border, and an anticipated resulting increase in tourism, DBRS Morningstar expects the traffic recovery to be slow and gradual, with the volumes returning to full pre-pandemic levels between 2023 and 2024. This represents an almost full year of delay from the expectation in 2020 and is due to the impact of the second and third waves in the first half of 2021. From a credit metrics point of view, the result of this delay is a prolonged period of material deterioration in DSCR levels, which have remained well below the BBB range. DBRS Morningstar now does not expect DSCRs to recover to BBB levels on a sustained basis until mid to late 2023. DBRS Morningstar also anticipates liquidity will be stressed because the effect of lower-than-forecast revenue in 2021 and the obligation to continue funding debt service and other expenses have led to tighter levels of cash reserves available in the General Revenue Account compared with the expectations that underpinned the rating confirmation in 2020 and a reduction in the amount of cushion available to deal with the possibility of extended pandemic effects. In this respect, DBRS Morningstar notes that case counts in Atlantic Canada are once again on the rise in autumn 2021 and observes that other geographic regions, such as Europe, have already had to reimpose lockdowns and travel restrictions following virus resurgences and the emergence of new variants. As a result, DBRS Morningstar’s rating view assumes a continued risk that some travel curbs may be required in 2022, prior to gradually receding pandemic effects later in the year and into 2023. 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, while a negative rating action could occur if a fifth pandemic wave is more severe than expected. DBRS Morningstar continues to monitor the coronavirus-related situation closely and sees that a prolonged impact of the pandemic on the Company’s business and financial profile, a materially lower General Revenue Account balance, or the incurrence of large, unexpected maintenance or rehabilitation items could put further negative pressure on the ratings. DBRS Morningstar will consider a positive action on the Issuer rating upon meaningful and sustained traffic recovery with the resulting DSCR returning to BBB-range metrics.

ESG CONSIDERATIONS
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 methodologies are Rating Public-Private Partnerships (August 19, 2021; https://www.dbrsmorningstar.com/research/383244); and DBRS Morningstar Criteria: Recovery Ratings for Non-Investment-Grade Corporate Issuers (August 19, 2021; https://www.dbrsmorningstar.com/research/383238) 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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