NAV CANADA Upgraded To 'AA' On Strong Business, Financial Profile, Notes Rated 'AA-'
TORONTO (Standard & Poor's) Feb. 9, 2006--Standard & Poor's Ratings Services
today said it raised its long-term issuer credit and senior unsecured debt
ratings on civil air navigation service provider NAV CANADA to 'AA' from
'AA-'. At the same time, Standard & Poor's assigned its 'AA-' subordinated
debt rating to NAV CANADA'S proposed general obligation notes. The outlook is
stable.
The rating assigned to NAV CANADA's proposed general obligation notes,
which are subordinated to the company's senior unsecured debentures issued
under NAV CANADA's 1996 Master Trust Indenture (MTI), reflects the security
features of the new borrowing platform, as well as Standard & Poor's notching
criteria, which are anchored by the issuer credit rating on NAV CANADA.
The one-notch differential between the ratings on NAV CANADA's senior
unsecured debt and the notes reflects the more limited security package
conferred to the subordinated class of debt. The security for senior unsecured
debt includes a lien over revenues, the revenue account, and debt service
reserve fund (DSRF), although the secured lien is postponed in favor of
operating and maintenance expenses. The notes are unsecured and subrogated to
prior payment of 1996 MTI debt obligations. In terms of events of default, the
same features exist for both borrowing platforms, except that a cross-default
on the senior unsecured debt triggers a default on the notes (but not
vice-versa). Acceleration of the notes and the enforcement of rights cannot
occur unless and until the senior debt has exercised its rights and
accelerated.
"The rating on the notes also reflects our corporate notching criteria,
which calls for subordinated debt to be rated one notch below the issuer
credit rating (for investment-grade credits) if the ratio of priority debt is
20% or more of total assets," said Standard & Poor's credit analyst Paul
Calder. "The notes will comprise about 70% of the total NAV CANADA debt stock
by fiscal 2012 (year ending Aug. 31) but it is estimated C$625 million in
senior unsecured debt at that time will still represent more than 20% of total
assets," Mr. Calder added.
The primary constraining factor holding back the company from an outright
upgrade during 2005 was NAV CANADA's pension plan deficit and the potential
that significant incremental cash funding would be required in the next few
years to comply with regulatory solvency requirements. The likelihood of an
upgrade in 2006 was linked to higher market interest rates improving the
company's pension liability balance and/or favorable regulatory treatment of
defined benefit pension plans for highly rated entities that do not operate in
a competitive environment, which might reduce NAV CANADA's projected pension
funding increases.
The upgrade reflects the potential substitution of the cash flow that was
to be deployed for principal amortization (to meet the declining MTI borrowing
capacity covenant- to zero by 2029) toward NAV CANADA's potentially higher
cash pension funding obligations. For example, Standard & Poor's estimates
that in the next 23 years (to 2029), in the absence of the proposed debt
amortization revisions, at a 4% compound annual reinvestment rate, the company
would need to fund about C$59.5 million per year to pay off its existing
C$2.175 billion MTI based senior unsecured debt burden by 2029.
The stable outlook reflects the expectation that the company's business
profile will not change and that NAV CANADA's improved financial profile will
not be eroded by its long-term pension contributions.
Complete ratings information is available to subscribers of
RatingsDirect, Standard & Poor's Web-based credit analysis system, at
www.ratingsdirect.com. All ratings affected by this rating action can be found
on Standard & Poor's public Web site at www.standardandpoors.com; under Credit
Ratings in the left navigation bar, select Find a Rating, then Credit Ratings
Search.
| Primary Credit Analyst: | Paul B Calder, CFA, Toronto (1) 416-507-2523; paul_calder@standardandpoors.com |
| Secondary Credit Analyst: | Mario Angastiniotis, Toronto (1) 416-507-2520; mario_angastiniotis@standardandpoors.com |
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