DBRS Confirms GTAA at “A,” Stable Trend

DBRS has today confirmed the Issuer Rating and the ratings for the Revenue Bonds and Medium-Term Notes of the Greater Toronto Airports Authority (GTAA or the Authority) at “A,” each with a Stable trend. Traffic conditions remain sound while debt needs are well contained, raising the possibility of a declining debt burden over the years to come. Efforts to improve Pearson International Airport’s fee competitiveness have put pressure on results and metrics, but the erosion should be relatively short lived.

Passenger traffic for the first nine months of 2013 was up 2.7% relative to the same period a year ago, following solid growth of 4.4% the year before. However, the more important determinant of aeronautical revenues, aircraft movements, was little changed as airlines continued to improve load factors. As such, limited offset was provided to the reduction of approximately 10.0% in aeronautical fees implemented early in the year, leading to a 3.0% decline in revenue nine months though the year. Spending was up 4.2% in part because of harsher winter conditions, translating into an 8.0% EBITDA decline. DBRS expects the trend observed in traffic and operating conditions to have continued over the remainder of the year. As such, EBITDA for the full year is likely to be slightly below $600 million. DBRS anticipates average annual passenger traffic growth of around 3% going forward across the system but notes that 2014 may be somewhat weaker given the recent deceleration observed on international routes and the soft though improving domestic economic conditions. With aeronautical fees projected to remain stable over the next two years, traffic and expanding retail activities are expected to be the key drivers of revenue, likely translating into annual revenue growth of 2% to 3%. Expenditures, on the other hand, are expected to continue to track inflation. As such, barring an economic downturn, EBITDA is likely to slowly strengthen in the years ahead but will take several years before returning to 2012 levels.

Total debt as calculated by DBRS remains well contained and stood at $7,042.3 million at September 30, 2013, little changed from year-end levels and in line with expectations. However, healthy traffic growth helped push debt per enplaned passenger down to $395 (based on 12-month rolling traffic), its lowest level since 2002. Liquidity also remains substantial, with restricted reserves up 16% since year-end 2012 to nearly $1.1 billion at September 30, 2013. The debt service coverage ratio (DSCR) for the nine-month period weakened slightly as a result of soft operating results but remained sound for the rating, at 1.5 times. The Authority continues to view its capacity as sufficient to meet demand for several years. As such, capital investments are projected to remain low for an extended period of time relative to historical levels. Barring a downturn in the sector, operating cash flow should materially exceed investments going forward, putting leverage on a slow downward trend. This, along with recovering EBITDA, should provide support to the DSCR and keep the credit profile on a solid footing.

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.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.