DBRS Morningstar Downgrades Ratings on Edmonton Regional Airports Authority to “A,” Negative Trends; Removes Ratings from Under Review with Negative Implications

DBRS Limited (DBRS Morningstar) downgraded Edmonton Regional Airports Authority’s (ERAA or the Authority) Issuer Rating and Revenue Bonds, Series A rating to “A” from A (high) with Negative trends and removed the ratings from Under Review with Negative Implications, where they were placed on April 8, 2020. The ratings downgrade results from the Coronavirus Disease (COVID-19)’s significant negative impact on passenger volumes at Edmonton International Airport and the Authority’s forecast that passenger volume recovery will only reach pre-coronavirus levels by 2024. DBRS Morningstar expects debt per enplaned passenger, a key metric in its risk assessment, to return to levels commensurate with the A (high) rating range only by 2022. The Negative trend reflects other medium-term risk factors, including DBRS Morningstar’s expectation that the debt service coverage ratio (DSCR) will remain below 1.00 times (x) for an extended period of time, the possible renewal risk for the $75 million credit facility beyond 2020, and associated weakening of the liquidity position.

Before the impact from the coronavirus, passenger volumes had declined by 1.2% to 8.15 million in 2019, primarily because the Boeing 737 MAX aircrafts were grounded in March 2019 and the economy in Edmonton had softened. The split of passenger traffic in 2019 remained similar to the previous year with domestic, transborder, and international segments contributing 83%, 12%, and 5% of passenger volumes, respectively. Revenues decreased by 0.9% to $231.7 million and EBITDA decreased by 1.8% to $109.4 million. As at YE2019, total debt decreased to $1,015.6 million from $1,053.1 million with bond amortization. As of December 31, 2019, debt per enplaned passenger was $258 and the DSCR was 1.42x.

The coronavirus pandemic has led to a high decline in global passenger volumes because of lockdowns and travel restrictions imposed by various governments and psychological aspects for passengers. The impact began in March 2020 and passenger volumes in April and May 2020 totalled only 6% compared with April/May 2019. As of June 2020, the Authority forecast 2.7 million passengers in 2020—34% of 2019 passenger volumes—and currently anticipates a return to 2019 levels by 2024, although the development of a coronavirus vaccine could lead to a faster recovery. Passenger volumes in June 2020 were better as volumes reached 12% of June 2019 volumes. DBRS Morningstar considers ERAA’s exposure to Alberta’s local economy, including the energy sector and oil price shocks, to be negative for medium-term passenger forecasts; however, the higher proportion of domestic passengers could offset this negative impact as DBRS Morningstar expects domestic passenger volumes to recover faster than international passenger volumes.

The Authority has been able to manage the cash flow impact by reducing its operational and capital expenditure budgets. Ground-lease payments by the Government of Canada (rated AAA with a Stable trend by DBRS Morningstar) have been waived until December 31, 2020. DBRS Morningstar notes that the six-month debt service reserve account, the three-month Operating and Maintenance Contingency Fund (collectively $35.8 million as of December 31, 2019), cash balances ($23.5 million as of December 31, 2019), and proceeds from the previous $180 million financing from the Alberta Capital Finance Authority in 2018, which remained intact in 2019, provide adequate liquidity for servicing debt payments in the near and medium term. The Authority forecasts a positive cash balance as of end of 2020 with the majority of proceeds from the $180 million financing remaining. DBRS Morningstar notes that ERAA has no refinancing requirements in the medium term and that the federal government could provide additional support aside from the waiver of ground-lease payments and wage subsidy, which has not been considered in the current forecasts.

DBRS Morningstar continues to monitor the coronavirus-related situation closely and believes that a prolonged impact of the pandemic leading to a slower-than-expected passenger volume recovery path or liquidity pressures could cause negative rating pressure. Renewing the $75 million credit facility beyond 2020, obtaining waivers from the lenders for the entire period when the covenants may be breached, and/or improving the DSCR could lead DBRS Morningstar to change the trend to Stable. Recovery to pre-pandemic financial metrics, either over time with eased restrictions or with faster development of a coronavirus vaccine, could result in positive rating action.

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.

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].

This rating was not initiated at the request of the rated entity.

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.

This is an unsolicited credit rating.

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].

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