DBRS Morningstar Downgrades Aéroports de Montréal to "A”; Trend Remains Negative

DBRS Limited (DBRS Morningstar) downgraded the Issuer Rating and Revenue Bonds rating of Aéroports de Montréal (ADM or the Authority) to “A” from A (high); the trend remains Negative. The rating downgrades mainly stem from the worse-than-expected passenger volume outlook in 2021 and a possibly longer recovery path compared with DBRS Morningstar’s forecast in July 2020. The existence of travel restrictions, which may change depending on the success of the global Coronavirus Disease (COVID-19) vaccine rollout, is likely to continue to exert pressure on the ratings.

Supported by a modest recovery during H2 2020, ADM reported total passenger volume in 2020 at approximately 5.5 million, or 27% of 2019 levels, somewhat lower than DBRS Morningstar’s previous forecast. Traffic recovery during Q4 2020 did not materialize as projected. The recovery in the international and transborder segments seems to have stalled because of the extension of border closures in Canada, which were further tightened recently (with measures including three-day hotel quarantines upon arrival in Canada and negative coronavirus tests required prior to boarding flights) to prevent new coronavirus variants from coming into the country. The domestic segment recovered faster; however, the magnitude of recovery was short of expectations as major Canadian airlines cut certain domestic routes to save costs and pent-up demand was not as high as anticipated.

To mitigate the negative financial impact of the coronavirus pandemic, the Authority has decided to (1) increase aeronautical fees by 2.5%, effective January 1, 2021; (2) increase Airport Improvement Fees to $35 from $30, effective February 1, 2021; and (3) make adjustments to the landing charge for all-cargo flights and set a minimum landing charge for all flights at Montréal-Trudeau International Airport, effective April 1, 2021. Despite these mitigation measures, DBRS Morningstar is of the view that, in the absence of stronger assistance from the government, the financial stress faced by ADM is likely to continue.

DBRS Morningstar has revised its base-case scenario and assumes annual total passenger volume in 2021 and 2022 to be 20% and 50% of 2019 levels, respectively, and assumes a full recovery to 2019 levels by 2025. DBRS Morningstar’s revised volume forecast for 2021 and 2022 is in line with ADM's current base-case projection. Under DBRS Morningstar’s revised base-case scenario, financial metrics are expected to be materially weakened and to not be commensurate with the A (high) rating category in the near term.

A material and negative deviation from DBRS Morningstar’s base-case volume forecast could result in a further negative rating action. Conversely, the ratings may stabilize if it becomes apparent that DBRS Morningstar’s base-case volume forecast will materialize. DBRS Morningstar understands that the Authority is planning on soliciting bondholders’ consent to exempt ADM from certain covenants under the Master Trust Indenture for 2021 and 2022. While not expected, a failure to receive relevant consents could result in a further rating action.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

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

The principal methodology is Rating Canadian Airport Authorities (April 6, 2020; https://www.dbrsmorningstar.com/research/359297/rating-canadian-airport-authorities), which can be found on dbrsmorningstar.com under Methodologies & Criteria. Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021; https://www.dbrsmorningstar.com/research/373262).

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 info@dbrsmorningstar.com.

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 info@dbrsmorningstar.com.

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