DBRS Morningstar Changes Trend on Vancouver Airport Authority to Negative, Confirms Ratings at AA (low)

DBRS Limited (DBRS Morningstar) changed the trend on Vancouver Airport Authority’s (VAA or the Authority) Issuer Rating and Senior Debentures rating to Negative from Stable and confirmed both ratings at AA (low). The trend change mainly stems from a significant decline in the projected total passenger volume in 2020 and a potentially long recovery period as a result of the ongoing Coronavirus Disease (COVID-19) pandemic combined with the Authority’s intention to increase leverage for enhanced liquidity and financing necessary capital programs. As a result, DBRS Morningstar expects VAA’s financial metrics to become much weaker than 2019 levels. Furthermore, additional waves of infection may require further government interventions to contain the pandemic, which could potentially interrupt the path to recovery; this level of uncertainty with respect to recovery will likely continue to exert pressure on the current ratings.

Total passenger volume rose by 1.7% in 2019, reaching 26.4 million, with contributions from all three segments—domestic, transborder, and international. All major revenue sources (except airport improvement fees) grew in 2019 with total revenue up 1.1%; however, because of faster expense growth while the Connect YVR program somewhat constrained aeronautical revenues, EBITDA in 2019 declined by 6.0%. After VAA issued the Series H Debentures in October 2019, total debt rose to approximately $900 million at the end of 2019, or close to $70 per enplaned passenger, compared with $46 per enplaned passenger in 2018. The interest coverage ratio (ICR) also reduced slightly to 8.3 times (x) from 9.1x because of higher interest and weaker EBITDA.

Performance during the first two months of 2020 was almost on par with the same period in 2019; however, as the World Health Organization declared the coronavirus a pandemic on March 11, 2020, and governments around the world implemented a series of containment measures, VAA experienced a dramatic traffic volume drop in March with monthly volume down 48% compared with last year. The Authority saw an even more severe impact in April 2020 as Canadian federal, provincial, and municipal governments began to impose more stringent travel bans and lockdown measures in the second half of March. Total traffic volume in April 2020 decreased by 97% compared with April 2019 and recovered slowly in May and June 2020, but was still 96% and 92% below the corresponding monthly levels in 2019, respectively. Total passenger volume in H1 2020 was 58% lower than that in H1 2019, consistent with the global air travel demand drop reported by the International Air Transport Association (IATA) on July 30, 2020.

In response to the pandemic, the Authority is managing operations conservatively based on the premise that total passenger volume in 2020 would be only 29% of the 2019 level, with no meaningful recovery in 2021, and a recovery to less than 50% of the 2019 level by 2024 (the VAA Planning Case). VAA has adopted a series of cost-cutting initiatives, such as laying off 25% of staff and cutting its 2020 capital expenditure (capex) budget by almost 50%. Moving forward, the Authority will focus on completing major projects that are underway and strategically significant, such as the CORE Program and the Pier D Terminal Expansion projects, plus any required sustaining capital. DBRS Morningstar expects total capex between 2020 and 2023 to reduce to $1.1 billion from the pre-pandemic forecast of $1.9 billion. DBRS Morningstar anticipates that VAA will add up to approximately $1.0 billion in additional debt between 2020 and 2024 to partially fund these expenditures, depending on the pace of recovery and any further reviews of the capital projects.

VAA has no imminent refinancing needs with the next repayment due on December 7, 2026, for the Series B Debentures. The Authority upsized its bank facility at the end of May 2020 to $450 million from $300 million. As of June 30, 2020, VAA had approximately $67 million in unrestricted cash and approximately $428 million was available under the bank line. DBRS Morningstar notes that the credit facility will revert to $300 million at the earlier of (1) its August 31, 2023, maturity date or (2) the Authority’s issuance of at least $200 million in debentures. If VAA does not issue any debentures this year, there would be $266 million available in the facility at December 2020 under the VAA Planning Case, suggesting adequate liquidity.

The Authority has requested consent to waive the 1.25x default ICR and the 1.75x additional indebtedness ICR requirements through 2023. The deadline to receive the written waiver is September 9, 2020, and September 16, 2020, is reserved for a debenture holders meeting if required. DBRS Morningstar understands that if these covenants are not waived, VAA may convert up to $29 million in retained earnings from Vancouver Airport Enterprises Ltd. into dividend income to avoid a potential breach of the 1.25x default ICR covenant in both 2020 and 2021.

DBRS Morningstar notes that on July 30, 2020, the IATA forecast that the annual global revenue passenger kilometres (RPK) in 2020 would decline by more than 60% compared with 2019, that the global RPKs would not fully recover to the pre-pandemic levels before 2024, and that the potential downside could be more severe than the upside. VAA experienced a slower volume recovery from the 2008–09 financial crisis than some of its peers, and DBRS Morningstar anticipates that the strained China-Canada relations could introduce additional uncertainties to VAA’s path to recovery. DBRS Morningstar currently assumes 7.7 million total passengers in 2020, followed by 12.2 million total passengers in 2021 and gradually growing to 23.3 million total passengers in 2024 (the DBRS Morningstar Base Case).

Under the DBRS Morningstar Base Case, DBRS Morningstar expects VAA’s major financial metrics to be much weaker in 2020, but to revert to the levels commensurate with the current ratings in 2021. DBRS Morningstar may change the trend to Stable after passenger volume has meaningfully recovered and key financial metrics are sufficiently restored. Conversely, DBRS Morningstar may take negative rating action if it becomes apparent that total passenger volume in 2021 will not be materially better than the VAA Planning Case, unless there is clear evidence suggesting that volume will catch up more quickly in later years.

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].

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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