DBRS Confirms GTAA Ratings at “A”, Trend Stable

DBRS has today confirmed the ratings of the Greater Toronto Airports Authority’s (GTAA or the Authority) Revenue Bonds and Medium-Term Notes at “A”, with a Stable trend. After a difficult year marked by a sharp contraction of the global economy and falling traffic volumes, the Canadian airport sector is experiencing a marked recovery in 2010, with traffic up notably at most major airports across the country. At Toronto Pearson International Airport (Pearson), passenger traffic dropped by 6.1% in 2009, owing to sizeable losses in the domestic and transborder segments. Faced with rapidly eroding business conditions, the Authority announced early in the year various cost-containment and revenue initiatives, which helped limit the year-over-year decline in EBITDA to a modest 3.9%. Most major capital projects were put on hold amid falling traffic, but total debt still ended 2009 up 4.8% to $7.9 billion, as the Authority opted to replenish its cash balances in view of uncertain operating conditions. Compounded by lower traffic, debt per enplaned passenger jumped to $521 while the debt service coverage ratio (DSCR) declined to 1.3 times on weaker operating results.

Operating conditions are looking much better across the system this year, as the global economic recovery has triggered a rebound in passenger traffic, including 4.7% growth recorded at Pearson through September 2010. However, improved traffic volumes have largely been offset by sizeable reductions in aeronautical fees, keeping revenues fairly stable year-over-year. EBITDA still showed modest improvement, helped by sustained spending discipline and savings resulting from the full implementation of the new revenue-based ground rent formula following a four-year transition phase during which payments were fixed. Total debt has dropped 6.8% year-to-date, as the maturity of MTN Series 2000-2 in July was mostly repaid with internal funds. This markedly reduced cash balances, although reserves remain considerable at September 30, 2010 ($957 million).

In its March 2010 report, the Authority’s consultant calls for annual passenger traffic growth averaging 2.5% over the next four years. DBRS views this outlook as conservative but notes that the slowing momentum of the global recovery introduces some downside risk for 2011. No material improvement is anticipated in EBITDA, as DBRS expects the Authority to continue to cut aeronautical rates, traffic conditions permitting. With the construction of Pearson’s Pier G unlikely to start before 2014, debt and the DSCR should stabilize around their current levels. This should allow debt per enplaned passenger to recede notably, adding flexibility to the financial profile before leverage resumes its upward trend.

Note:
All figures are in Canadian dollars unless otherwise noted.

The applicable methodology is Rating Canadian Airport Authorities, which can be found on our website under Methodologies.