DBRS Morningstar Assigns A (high) Rating to Aéroports de Montréal’s Revenue Bonds, Stable Trend

DBRS Limited (DBRS Morningstar) assigned a rating of A (high) with a Stable trend to the $500 million Series R Revenue Bonds (the Bonds) issued by Aéroports de Montréal (ADM or the Authority), and noted that the Issuer Rating and the ratings assigned to ADM’s pre-existing Revenue Bonds are not affected as a result of the issuance of the Bonds. The Bonds will be direct obligations of ADM, ranking pari passu with all other indebtedness secured pursuant to its Master Trust Indenture. Bond proceeds will be used to fund ADM’s capital program and its general corporate activities. The Bonds will be non-amortizing, pay interest semi-annually, and will mature on April 21, 2050. The ratings assigned to the Bonds is based on the rating of an already outstanding debt series of the above- mentioned debt instrument.

Passenger traffic in 2019 grew by 4.5% to 20.3 million. All three sectors, domestic, transborder, and international, contributed to the growth at 0.6%, 2.3%, and 9.3%, respectively. Revenues grew by 9.6%, driven by higher passenger traffic, disposal of buildings, and the full-year effect of an increase in airport improvement fees to $30 from $25 on April 1, 2018. Operating expenses increased by 10.2%, attributable to mitigation costs to maintain a high level of service for travellers in a context of infrastructure undercapacity, costs related to the transition of the technology operating model, preliminary exploratory steps related to the airside development program, and the implementation costs of initiatives designed to enhance competitiveness. EBITDA increased by 9.7%, reaching $353.6 million, and the Authority recorded an operating surplus of $97.8 million. With no new debt issued during the year, debt service payments and increased EBITDA, the debt service coverage ratio (DSCR) rose to nearly three times (x). The total debt per enplaned passenger decreased to approximately $202 by the end of 2019 from approximately $210 at the end of 2018.

During the first two months of 2020, passenger volumes continued to grow by approximately 5.6% compared to the same period in 2019. However, as the World Health Organization declared Coronavirus Disease (COVID-19) a pandemic on March 11 and a series of containment measures by governments around the world started to take effect, ADM saw dramatic traffic volume drop in March, with the monthly volume down 47% compared with last year. An even more severe impact has been observed in early April as Canadian governments at all levels started to impose more stringent travel bans and lock down measures in the second half of March. Total volume in April is expected to decrease by more than 90% compared with April 2019. Assuming that there will be some success in containment within Q2 2020 and a gradual relaxation of restrictions and economic recovery in Q3 2020 with a notable rise in air traffic starting in Q3 2020 (the Assumptions), the Authority currently predicts that its annual traffic volume in 2020 would be 35% lower than that in 2019. The Authority further predicts that its total traffic volume in 2021 would recover close to the 2019 level.

DBRS Morningstar notes that the Authority’s 2020 volume forecast is in line with the updated impact assessment by International Air Transport Association on April 14, 2020, predicting a 36% annual revenue passenger kilometres drop in North America in 2020, assuming that the domestic lock down would last three months until the end of Q2 2020, but international travel restrictions would be lifted more slowly with only 50% recovery by Q4 2020.

Nevertheless, the airport sector typically has a greater sensitivity to GDP than do other sectors. Barring any effective vaccines and drug treatments or other measures by airlines to restore passengers’ confidence in air travel, the shadow of coronavirus may linger, causing a protracted recessionary period due to great uncertainty with respect to the effectiveness of each country’s containment measures and fiscal and monetary policies. As such, the timing of the path to recovery could vary considerably across countries, which in turn would affect ADM’s international and transborder segments.

DBRS Morningstar currently assumes that ADM will take up to two years to fully recover to the pre-crisis level, reaching 2019 volumes only in 2022. Under the DBRS Morningstar base case scenario, the DSCR is expected to fall to 1.7x in 2020 from close to 3.0x in 2019 and the minimum DSCR of 1.65x is expected to occur in 2021. Debt per enplaned passenger is expected to rise considerably to $401 in 2020 from $202 in 2019, gradually decline to $275 in 2022 and then gradually rise again in 2023 and 2024 due to future debt issuances.

DBRS Morningstar expects that the medium- to long-term business risk fundamentals continue to be supported by the economic strength of the catchment area, well-diversified passenger mix and revenue sources, and the Authority’s prudent management style, all of which lend support to the rating.

DBRS Morningstar notes that as part of Canada’s COVID-19 Economic Response Plan, the Finance Minister announced that the government is waiving ground leases from March 2020 through to December 2020 for the 21 airport authorities that pay rent to the federal government, including ADM. Furthermore, the new Canada Emergency Wage Subsidy provides a 75% wage subsidy to eligible employers for up to 12 weeks retroactive March 15, 2020. DBRS Morningstar understands that ADM is considered an eligible employer and is expected to save about $8.3 million in salaries in 2020. In addition to the proceeds of the Bonds, the Authority also has approximately $40 million in cash as at March 31, 2020, and $70 million in a committed but undrawn credit facility to provide liquidity during this year. Approximately $120 million in debt service payments will become due this year, though there is no debt refinancing expected until 2033. DBRS Morningstar further notes that the Authority has around $55 million in restricted cash to provide additional liquidity.

The DBRS Morningstar base case could be revised as the coronavirus pandemic continues to develop rapidly. A positive rating action is unlikely. DBRS Morningstar will monitor ADM very closely and will revisit the analysis if it becomes apparent the Assumptions are no longer valid.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

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

The principal methodology is Rating Canadian Airport Authorities (April 6, 2020), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

DBRS Limited
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577