DBRS Morningstar Changes Trend on Aéroports de Montréal to Negative

DBRS Limited (DBRS Morningstar) changed the trend on the A (high) Issuer Rating and Revenue Bonds rating of Aéroports de Montréal (ADM or the Authority) to Negative from Stable. The trend change mainly stems from a worse-than-expected decline in the projected total passenger volume in 2020 and a longer recovery period than previously anticipated, as a result of the ongoing Coronavirus Disease (COVID-19) pandemic. The level of uncertainty with respect to the recovery, which could potentially be interrupted by additional waves of infection that may require further government interventions, is likely to continue to exert pressure on the current ratings.

Total passenger volume in April and May 2020 were both approximately 98% lower than the same months in 2019, which is worse than expected. Cumulative passenger volume by the end of May 2020 was approximately 47% lower than the same period last year. The Authority has adopted a series of cost-cutting initiatives, including decreases of salary and benefits and a 5% reduction of staff as a result of layoffs and not replacing positions left vacant by departures. Expected capital expenditures in 2020 is also reduced by around 48%, compared to budget. ADM estimates passenger traffic in Q2 2020 to fall sharply by 97% compared to Q2 2019, worse than the previous estimate of 80%. ADM expects passenger traffic to gradually recover after the ease of travel restrictions starting in Q3 2020 until the end of the year. The Authority currently predicts that its annual traffic volume in 2020 would be 64% lower than that in 2019, much worse than the previously estimated 35%, and that traffic volume would fully recover by 2023, which is considered by DBRS Morningstar to be potentially optimistic.

Compared with its forecast in April, predicting a 36% annual revenue passenger kilometres drop in North America and USD 252 billion global passenger revenue losses in 2020, the International Air Transport Association currently predicts approximately USD 420 billion global revenue losses in 2020. Back in March 2020, the Canadian Airports Council predicted between 55% and 71% traffic declines for the second quarter of 2020, which has been clearly surpassed by the 97% volume loss estimated by ADM for Q2 2020.

Because of the worse-than-expected performance and the uncertainties with respect to the easing of various travel restrictions imposed by the Government of Canada, DBRS Morningstar has revised its base case scenario. DBRS Morningstar currently assumes the annual total passenger volume in 2020 and 2021 to be 30% and 58% of the 2019 level, respectively, and a full recovery to the 2019 level by 2024. As a result, DBRS Morningstar expects the Authority to partially utilize its cash on hand to meet all the financial obligations in 2020. The gross debt service coverage ratio (DSCR) for 2020 is expected to be above the 1.25 times (x) minimum required whereas the DSCR in 2021 is anticipated to be only marginally above the 1.0x minimum required as per the Master Trust Indenture. Debt per enplaned passenger is expected to rise considerably to more than $800 in 2020 from $202 in 2019 and then gradually decline to about $300 in 2023 but rise again in 2024 because of future debt issuances. DBRS Morningstar notes that ADM has an unfettered ability to set rates and charges, including the airport improvement fee. While not anticipated to be necessary, ADM could increase its rates and charges, notably improving the DSCR under our base case scenario.

DBRS Morningstar has also revised its stress case scenario, where it assumes the traffic volume in 2020 and 2021 to be 25% and 50% of the 2019 level, respectively, and a full recovery by 2025. Under the DBRS stress case scenario, the DSCR is forecast to fall below 1.0x in both 2020 and 2021 but will rebound to above 1.6x from 2022 onward.

As at May 31, 2020, the Authority has approximately $416 million in cash, and $65 million in a committed but undrawn credit facility to provide liquidity during this year. Approximately $72 million in debt service payments will become due by the end of 2020, though there is no debt refinancing expected until 2033. DBRS Morningstar further notes that the Authority has around $56 million in restricted cash to provide additional liquidity.

The rating may stabilize when it becomes apparent that our base case forecast will materialize and the financial metrics are sufficiently restored. Further negative rating action may result if the DBRS Morningstar stress case scenario becomes a reality.

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.

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.

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

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