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Rating Action:

Moody's upgrades NAV CANADA's senior unsecured rating to Aa2; Assigns Aa2 rating to the proposed C$250MM senior unsecured notes

10 Feb 2016

Approximately C$2.0 billion of debt affected

Toronto, February 10, 2016 -- Moody's Investors Service (Moody's) today affirmed NAV CANADA's base line credit assessment (BCA) at aa2 and its senior secured rating at Aa2. It also upgraded the senior unsecured rating to Aa2 from Aa3. Concurrently with this rating affirmation, Moody's assigned a Aa2 rating to the C$250 million 30 year Series 2016-1 senior unsecured general obligation notes expected to be issued by NAV CANADA under a new MTN Shelf of $500MM to which we also assigned a (P) Aa2 rating. The proceeds from the bond issue will be used to partially refinance the upcoming bond maturity on February 24, 2016. The new unsecured debt will be issued under NAV CANADA's general obligation indenture dated February 21, 2006 and thus will rank pari passu with the existing senior unsecured debt of NAV CANADA. The outlook is stable.

Upgrades:

....Senior Unsecured Regular Bond/Debenture, Upgraded to Aa2 from Aa3

Assignments:

....Senior Unsecured Medium-Term Note Program, Assigned (P)Aa2

....Senior Unsecured Regular Bond/Debenture, Assigned Aa2

Outlook Actions:

....Outlook, Remains Stable

Affirmations:

....Senior Secured Regular Bond/Debenture, Affirmed Aa2

Withdrawals:

..Issuer: NAV CANADA

....Multiple Seniority Medium-Term Note Program (Local Currency), Withdrawn , previously rated (P)Aa3

....Senior Unsecured Medium-Term Note Program (Local Currency), Withdrawn , previously rated (P)Aa3

RATINGS RATIONALE

"The affirmation of the BCA and of the senior secured rating for NAV CANADA reflects the strong operating and financial performance over the past few years. The performance is underpinned by sustained aeronautical traffic growth following the recessionary period experienced in Canada and throughout the world (+2.9% annual growth rate in weighted charging units since 2010). In the same period, NAV CANADA was able to meet all its obligations (including pension plan related obligations) without any rate increase (there has not been any rate increase in over 11 years), financed all its capital expenditures through cash flows, including its investment in Aireon LLC, and was able to repay some debt ($266MM net reduction since 2010) with further reductions likely in fiscal 2016 (from the partial refinancing of the February 2016 maturity) and 2017 (from the proceeds of the maturing ABCP notes). All these trends position NAV CANADA very well for any potential future weakness in air traffic that could result from weak economic conditions in Canada and many parts of the world. However we also note that NAV CANADA is now in a position to consider a rate reduction and/or a one-time rate rebate as it has a notional liability of $124MM to the airlines in its rate stabilization account and it has now recovered all its deferred pension costs (a prerequisite to any rate decrease). If traffic growth continues, we expect that rates will be decreased in the latter part of the calendar year although we expect that NAV CANADA will be prudent in its assumption for future traffic growth and obligations when deciding the quantum of the rate decrease and that it will ensure that its financial profile remains solid. Also, although NAV CANADA has made progress in dealing with the ongoing defined benefit pension plan deficits, we expect that the need for the company to fund additional contributions will be recurring until the benefit of some of the measures it is implementing to reduce its exposure to potential large pension deficits becomes more material. The upgrade of the senior unsecured rating reflects the fact that there is a declining amount of secured debt within the overall capital structure of NAV CANADA and that while there is some additional protection in the form of security for the senior secured debt, it is not enough to result in a full notch difference with the rating of the senior unsecured debt " says Catherine Deluz, lead analyst for NAV CANADA.

NAV CANADA's credit ratings (Aa2 senior secured/Aa2 senior unsecured) reflect a BCA of aa2, low default dependence with and low probability of extraordinary support from the Government of Canada (Aaa). The ratings take into account NAV CANADA's strong fundamentals operating as the sole civil air navigation service provider in Canada covering a very large airspace, the outright ownership of its assets, its sustained growth and evidence of sound and prudent management of its obligations, and ultimately NAV's unfettered right to set rates, fees and charges within a short timeframe to meet its obligations as needed.

RATIONALE FOR THE STABLE OUTLOOK

The rating outlook is stable, reflecting our expectation that NAV CANADA will be prudent and take into account its overall financial position and upcoming obligations when contemplating a rate decrease and vice versa that it will implement the necessary rate increases if traffic growth does not materialize.

What Could Change the Rating - Up

Upward rating pressures are unlikely at this stage given NAV CANADA's propensity to draw down the notional balance of its rate stabilization account thereby weakening its financial position (on a cash basis) during recessionary times and given its recurring pension liability funding obligations

What Could Change the Rating - Down

- Deterioration in air traffic coupled with a reluctance on the part of management to raise rates if required in order to offset material traffic declines

- A debt service coverage ratio (with Moody's adjustments including adjustments related to the pension liability) which falls to below 1.5 times on a sustained basis

- Any curtailment on the ability of NAV CANADA to set rates at levels sufficient to recover all costs and debt service and maintain supportive liquidity

- Inability to refinance maturing debt issues in the debt capital markets

The principal methodology used in these ratings was Privately Managed Airports and Related Issuers published in December 2014. Other methodologies used include the Government-Related Issuers methodology published in October 2014. Please see the Ratings Methodologies page on www.moodys.com for a copy of these methodologies.

NAV CANADA is a non-share capital corporation which owns, operates and maintains Canada's civil air navigation system (ANS). It acquired the ANS from the Government of Canada in 1996. It operates the ANS through seven area control centres located at Vancouver, Edmonton, Winnipeg, Toronto, Montreal, Moncton and Gander, 41 control towers, 55 flight service stations, eight flight information centres and various other assets across Canada. NAV CANADA is governed by the 1996 Civil Air Navigation Services Commercialization Act (ANS Act). NAV CANADA's debt is supported solely by the revenue stream the company generates through the provision of air navigation services to operators and aircraft owners within the Canadian controlled airspace and none of that debt is supported either implicitly or explicitly by the Government of Canada.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The rating has been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

Moody's has not provided advisory services but may have provided Ancillary or Other Permissible Service(s) to the rated entity, its related third parties and/or the party that requested the rating within the past two years (including during the most recently ended fiscal year). Please see the special report "Ancillary or other permissible services provided to entities rated by MIS's credit rating agency in Canada" on the ratings disclosure page www.moodys.com/disclosures on our website for further information.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Catherine N. Deluz
Senior Vice President
Corporate Finance Group
Moody's Canada Inc.
70 York Street
Suite 1400
Toronto, ON M5J 1S9
Canada
(416) 214-1635

Chee Mee Hu
MD - Project Finance
Project Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Canada Inc.
70 York Street
Suite 1400
Toronto, ON M5J 1S9
Canada
(416) 214-1635

Moody's upgrades NAV CANADA's senior unsecured rating to Aa2; Assigns Aa2 rating to the proposed C$250MM senior unsecured notes
No Related Data.
© 2019 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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