DBRS Morningstar Confirms Vancouver Airport Authority at AA (low), Negative Trend

DBRS Limited (DBRS Morningstar) confirmed Vancouver Airport Authority’s (VAA or the Authority) Issuer Rating and Senior Debentures rating at AA (low). Trends remain Negative. The rating confirmations reflect DBRS Morningstar's expectation that the traffic volume will gradually recover from the Coronavirus Disease (COVID-19) pandemic and that the ratings will continue to be supported by long-term drivers, such as the economic strength of the service area. The Negative trends mainly stem from the uncertainties that remain in the path to recovery, which may be interrupted by additional waves of infection triggering extended lockdown and border closures.

Total passenger traffic declined by approximately 72% in 2020 to 7.3 million. Total revenue and EBITDA in 2020 declined by 51.0% and 72.7%, respectively, partially offset by savings in ground lease, and largely in line with expectations. After issuing the Series I and Series J debentures in September 2020, the Authority reported approximately $1.5 billion total debt by the end of 2020, or $408 per enplaned passenger, which is significantly higher than the $68 per enplaned from the previous year. Correspondingly, the DBRS Morningstar-adjusted interest coverage ratio (ICR) dropped to 1.7 times (x) in 2020 from 8.3x in 2019.

As many countries had to renew their lockdown measures to contain the resurgence of the coronavirus with new variants of concern circulating globally, the optimism that the aviation industry had going into 2021 quickly dissipated and air traffic fell again in Q1 2021. As such, DBRS Morningstar has revised its base-case scenario and currently assumes total passenger volume in 2021 and 2022 to be 17% and 44% of 2019 levels, respectively, and an essentially full volume recovery in 2025. Under this scenario, DBRS Morningstar expects VAA’s major financial metrics to remain weak in 2021, but to revert to the levels commensurate with the current ratings in 2022 and then continue improving with further traffic recovery.

VAA’s updated capex plan entails an estimated spending of $700 million in real dollars, divided evenly in each year between 2021 and 2024. The majority of capex spending will be dedicated to maintaining or renewing existing assets while ensuring safety and regulatory compliance. DBRS Morningstar notes that the updated capex plan reflects a further reduction from the Authority's plan last year and, as a result, VAA does not anticipate additional debt to be incurred between 2021 and 2024, lending some support to the credit.

Capital outlays are expected to be mainly funded by cash. Cash balance is expected to gradually decline to $88.7 million in 2022, mainly as a result of capex spending. VAA currently has a $450 million credit facility, of which approximately $422 million remains available to date, with the remainder allocated for letters of credit outstanding to support post-retirement benefits. DBRS Morningstar expects VAA to have adequate liquidity to cover all operational and financial expenditures under the base-case scenario.

The ratings may stabilize when it becomes apparent that DBRS Morningstar’s base-case forecast will materialize. Conversely, a material and negative deviation from DBRS Morningstar’s base-case forecast or a material increase in leverage before traffic volume is sufficiently recovered could result in a negative rating action.

ESG CONSIDERATIONS
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 7, 2021), 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 [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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