DBRS Morningstar Confirms Ratings on Greater Toronto Airports Authority at A (high) and R-1 (low), Stable Trends

DBRS Limited (DBRS Morningstar) confirmed the Greater Toronto Airports Authority’s (GTAA or the Authority) Issuer Rating at A (high) and Commercial Paper (CP) rating at R-1 (low) with Stable trends. The rating confirmations are based on the Authority’s healthy cash reserve balance, which mitigates the near-term passenger volume challenges due to containment measures related to the Coronavirus Disease (COVID-19) pandemic and the expectation of deteriorated debt per enplaned passenger levels in the shorter term.

GTAA served 50.5 million passengers in 2019, an increase of 2.0% over 2018 levels, driven by growth in the international and transborder segments. The higher passenger traffic resulted in a 3.4% year-over-year (YOY) revenue increase, exceeding $1.5 billion. Operating expenses, as calculated by DBRS Morningstar, grew by 5.9%, although EBITDA improved to $725.8 million (0.7%) YOY. For 2019, aeronautical revenues (excluding airport improvement fees) increased by 1.5% YOY while commercial revenues increased by a sound 10.7% because of higher traffic. However, the ongoing grounding of the Boeing 737 MAX aircraft as well as economic and geopolitical challenges that resulted in reduced trade with China negatively affected passenger and flight activity in 2019.

The positive trends of 2019 continued in early Q1 2020 until the World Health Organization declared the coronavirus a pandemic in mid-March 2020, which caused passenger traffic to decrease to 9.6 million—17.4% less than the same period last year. Revenues also dropped by 6.4% to $339.1 million in Q1 2020, but EBITDA remained at $154.8 million—0.1% higher than the same period last year—driven by operational losses due to significant revenue reductions, which offset cost savings from the federal government’s waiving of ground-lease rents from March to December 2020. During the quarter, aeronautical revenues increased by 0.1% over the same period last year to $126.3 million while commercial revenues decreased by 2.0% because of lower car parking and ground transportation revenues.

At the end of 2019, total debt was $6.4 billion—$41.4 million higher than one year earlier. The debt service coverage ratio (DSCR), as calculated by DBRS Morningstar, increased slightly to 2.2 times (x) in 2019 as a result of slower revenue growth. On a per-enplaned-passenger basis, debt levels continued their downward trajectory and, by the end of 2019, total debt per enplaned passenger improved to $254.

Globally, demand for air travel has declined by 95% since the beginning of the coronavirus pandemic as many governments implemented various measures to contain the virus, resulting in an economic contraction. In March 2020, the GTAA’s passenger traffic dropped by 48.0% compared with March 2019 with an even more severe impact in April 2020, when passenger volume declined by 98.0% compared with April 2019. Q1 2020 passenger traffic decreased by 17.4% to 9.6 million YOY with effects on both the international (-17.9% YOY) and the domestic (-16.2% YOY) sectors. In April 2020, total revenues dropped by 53.4% compared with April 2019. Total debt per enplaned passenger increased to $285 in March 2020 from $259 in March 2019 because of lower passenger volume and higher debt. At the end of March 2020, the Authority drew $480.0 million of cash from its revolving operating credit facility to mitigate the impact of the coronavirus on its revenues and operations and to provide additional flexibility. As of March 31, 2020, the GTAA had unrestricted cash of $460.3 million and available undrawn credit of $875.0 million under its operating credit facility. There are no bonds that mature and require refinancing until September 2022.

DBRS Morningstar has developed a base case taking into account the current containment measures and travel restrictions, expecting the overall annual passenger volume in 2020 to decline by more than 65% compared with 2019 as well as a full recovery by 2024, which is longer than the average 2.0- to 3.5-year recoveries following previous demand shocks as the coronavirus pandemic is more severe in depth and duration. Revenues, on the other hand, will likely decrease by less than 40% in 2020 supported by the GTAA’s long-term agreements with principal airlines operating from Toronto Pearson International Airport as well as its commercial contracts. DBRS Morningstar expects full recovery in revenues by 2024 as well. The coronavirus pandemic’s impact on passenger volume will likely materially deteriorate debt per enplaned passenger in the shorter term, falling to the BBB rating category for 2020 before returning to metrics commensurate with the A (high) rating category in 2023. The DSCR, as calculated by DBRS Morningstar, will be outside the A (high) range, though never below 1.0x, until 2023 and back to the A (high) range in 2024. DBRS Morningstar has also developed a stress case with a further 28% decrease in passenger volume for 2020 compared with 2019 and full recovery in 2025. In this case, debt per enplaned passenger would fall into the BBB range during 2020 and the DSCR, as calculated by DBRS Morningstar, is below 1.0x for 2020 and 2021 before returning to the “A” range in 2022. Under both cases, the ratings fall to the “A” range only during 2020 before returning to the A (high) range in 2021, which supports the confirmation of the ratings.

On July 6, 2020, GTAA launched a process to its lenders to consider an amendment to the Master Trust Indenture, which would temporarily relieve the Authority from complying with its Rate Covenants (DSCR and operating coverage ratio) for the fiscal years 2020 and 2021. The election deadline is July 22, 2020, and must be approved by 66 2/3% of the bondholders entitled to vote. If there are insufficient votes, then a meeting will be held on July 31, 2020. From DBRS Morningstar’s point of view, the approval of this waiver would not put negative pressure on the ratings because the DSCR, as calculated by DBRS Morningstar, in its base case remains above 1.0x for the contemplated period.

In November 2019, GTAA approved a capital program for 2020–24 which has been dramatically reduced in response to the coronavirus impacts. For 2020, the Authority has reduced the capital program by $265 million and future years spending will be sized in line with air travel activity and cash flow requirements. As part of its cost-savings strategy, GTAA announced on July 14, 2020, that it reduced its workforce by 27% encompassing 500 roles (200 unfilled positions together with voluntary departures and layoffs totalling approximately 300 employees, including two members of the executive team) and temporarily reduced executive and Board of Director salaries for the remainder of 2020.

DBRS Morningstar continues to monitor the coronavirus-related situation closely and believes that a prolonged impact of the pandemic on the air transport industry as well as GTAA’s business and financial profile could put negative pressure on the Authority’s credit rating. DBRS Morningstar could also take a negative rating action with a significantly pronounced and extended decline in revenues compared with predictions in its base case, leading to lower financial metrics that no longer correspond with the current rating. DBRS Morningstar does not expect a positive rating action at this time.

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.

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 under Related Documents or by contacting us at [email protected].

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

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.

DBRS Morningstar will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving this report, contact us at [email protected].

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

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