DBRS Confirms Rating of Vancouver International Airport Authority at AA (low)

DBRS has today confirmed the Senior Debentures of Vancouver International Airport Authority (VIAA or the Authority) at AA (low) with a Stable trend, supported by the recent successful delivery of a major capital program, very solid financial metrics and a proactive management team. However, the Authority has made significant additions to its capital plan, which has slightly impaired the medium-term outlook for debt and financial metrics relative to the scenario provided in DBRS’s previous rating report.

Increased passenger volume of 3.7% in 2010 led to total revenue growth of 2.7% and corresponding growth in landing fees, concessions, airport improvement fees and rental and other income. Passenger volumes were expected to benefit from the 2010 Winter Olympics, but actual growth slightly exceeded DBRS’s expectations. International and transborder passenger volumes increased at a significantly greater rate than domestic traffic, a reflection of a strong gain in passengers travelling to and from the Asia–Pacific region, increased travel from Europe during the Winter Olympics and a rising Canadian dollar, which encouraged travel from Canada to the United States.

A notable reduction in ground lease expenses of almost 50% year over year, a result of the complete phase-in of a new rent formula, was more than ample to offset cost pressures encountered in every other expense category, in part from one-time events such as the Winter Olympics and a major conference. As a result, EBITDA increased to $194.1 million in 2010 from $161.4 million in 2009.

Total debt declined by $84 million to $607 million, or $72 per enplaned passenger, for the year ending December 31, 2010. The amount of debt reduction came in ahead of expectations, thanks to increased profitability and a good resolve by the Authority to pay down its operating line in 2010. Higher EBITDA, combined with lower debt, resulted in the coverage ratio increasing to 5.9 times (x) from 4.9x in 2009, a level significantly higher than that of other DBRS-rated airport authorities. DBRS expects the operating profile to remain sound over the medium term, although the introduction of the Gateway Incentive Program, which offers airlines the opportunity to lock in aeronautical fees for five years at 2010 rates in return for a commitment to grow traffic at the airport, will likely slow revenue growth. Furthermore, the Authority will be introducing a number of new capital projects focused on reducing connection times and improving efficiency in the hopes of promoting traffic volume growth.

The capital program for the 2011 to 2015 period incorporates notable annual expenditures of up to $220 million, which will cause free cash flow to be negative over the medium term and will require the Authority to raise additional financing. Debt is projected to bounce back to $675 million by 2014, or $77 per enplaned passenger, about 10% higher than its current level. Projected debt per enplaned passenger remains by far the lowest among DBRS-rated Canadian airport authorities and is relatively low for the current rating. The Authority is expected to continue generating strong EBITDA figures, assisting in the management of debt and supporting coverage ratios. VIAA intends to keep its capital plan responsive to the pace and magnitude of passenger growth; therefore, planned expenditures could increase as time goes on.

DBRS expects that 2011 traffic growth will be modest compared with the previous year because of the one-time boost provided by the 2010 Winter Olympics, softening growth momentum for the global economy and the 0.5% growth in passenger volumes noted over the first five months of 2011. Nonetheless, traffic growth is expected to average approximately 3% per year over the next few years, supported by the implementation of the Gateway Incentive Program. Should there be a major decline in demand in any given year, coupled with performance slightly below expectations in other years, DBRS estimates that the Authority could require up to $50 million of additional debt over their projections for 2014, causing debt to peak at approximately $725 million, assuming capital expenditures continue as planned. At approximately $84 per enplaned passenger, debt would, however, be at a level that would be easily manageable at the current rating level. In reality, VIAA would likely try to defer capital expenditures in years where performance was significantly below expectations, as demonstrated by the Authority’s prudent debt management approach to date.

Notes:
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.