TEXT-S&P affirms Halifax-Dartmouth Bridge Commission 'AA-' rating
Overview -- We are affirming our 'AA-' long-term issuer credit rating on Halifax-Dartmouth Bridge Commission. -- In part, the rating reflects our view of the commission's strong financial risk profile, near-monopoly position, and long history of stable growth in traffic revenues. -- The stable outlook reflects Standard & Poor's expectation that, in the next two years, HDBC's liquidity will continue to be robust and that its capital spending program and related debt issuance will not increase significantly beyond the current plan. Rating Action On Nov. 9, 2012, Standard & Poor's Ratings Services affirmed its 'AA-' long-term issuer credit rating on Halifax-Dartmouth Bridge Commission (HDBC). The outlook is stable. Rationale The rating on HDBC primarily reflects Standard & Poor's opinion of its strong financial risk profile, a near-monopoly position on vehicular traffic, a long history of relatively stable growth in traffic revenues, and adequate liquidity. In our view, partially offsetting these strengths are the commission's lack of toll-setting autonomy, and a relatively higher level of traffic risk as a result of the two-bridge system's lesser degree of traffic diversity compared with those of some other systems with multiple tolled facilities. As of fiscal year-end 2012 (March 31), HDBC continued its long tradition of strong operating performance, and once again maintained a strong financial risk profile. As expected, as of March 31, the commission's cash interest coverage strengthened to 8.1x, compared with 6.2x in the previous 12 months. In addition, HDBC's debt service coverage ratio (DSCR) improved to 3.8x from 2.9x year-over-year. We expect that credit metrics will continue to improve in the next two years, largely as a result of the existing debt's amortizing structure and continued minimal draws on its line of credit. In the next three-to-four years, we expect that a large portion of the planned capital expenditure will be debt-funded, so we expect that debt service coverage will decrease notably, to a level more in line with historical performance of 2.0-3.0x. HDBC's near-monopoly position on vehicular traffic in its service area underpins its strong business position. With a lack of significant competitive alternatives, the commission's two bridges benefit from their strategic locations and are the primary link between downtown Halifax and Dartmouth, N.S. (across Halifax Harbor). HDBC also benefits from a long history of relatively uninterrupted traffic growth, as well as historically stable traffic-revenue growth. Traffic volume and toll revenues have increased an average of 5.9% and 7.6% a year, respectively, since 1955. However, in 2011, traffic and toll revenues declined modestly, 0.50% and 0.03%, respectively, from record levels achieved in the previous year. As of Oct. 31, 2012, year-to-date traffic volumes on both bridge systems have increased about 1.6%. We believe the commission's liquidity is adequate. In addition to a C$60 million revolving, unsecured line of credit from the Province of Nova Scotia (A+/Stable/A-1+), HDBC has reserve accounts for debt service; capital; and part of the annual operating, maintenance, and administrative budget. The commission also has a C$5 million operating loan facility, which is renewed annually. These liquidity sources provide financial flexibility to HDBC to manage unexpected revenue or cost variances. We expect that the commission will maintain a minimal draw of less than C$5 million on its line of credit in the next two years. In our view, partially offsetting these factors is HDBC's lack of toll-setting autonomy, given that the Nova Scotia Utility and Review Board (NSUARB) must approve the toll structure. In fiscal 2011, for the first time since 1992, the NSUARB approved a toll increase of 20 cents for passenger vehicles using MACPASS (phased in over two years), and 25 cents per passenger vehicles paying cash, both whose proceeds will help fund the bridges' long-term maintenance needs. In accordance with our criteria for government-related entities (GREs), our view of a "low" likelihood of timely and sufficient extraordinary government support reflects our assessment of the "limited importance" of HDBC's role and its "limited" link with the province. The rating on the GRE is above the rating on its government, based on our view that it operates as a fairly independent enterprise with a strong financial risk profile. Outlook The stable outlook reflects Standard & Poor's expectation that with the continuing penetration of electronic tolling, modest traffic and revenue growth will persist in the next two years. As a result of lower amortizing debt, HDBC's adjusted DSCRs should remain above 3x during our outlook horizon. An upward rating revision is unlikely in this period. Although we believe it is also unlikely, material weakening of the commission's financial risk profile--such as DSCRs narrowing due to significant lower toll revenues from declines in vehicular traffic or unexpected debt issuance--could result in a negative rating action. Related Criteria And Research -- Rating Government-Related Entities: Methodology And Assumptions, Dec. 9, 2010 -- USPF Criteria: Toll Road And Bridge Revenue Bonds, June 13, 2007 Ratings List Halifax-Dartmouth Bridge Commission Rating Affirmed Issuer credit rating AA-/Stable/-- Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. 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