DBRS Morningstar Confirms Greater Toronto Airports Authority at A (high), Stable Trend

DBRS Limited (DBRS Morningstar) confirmed the Greater Toronto Airports Authority’s (GTAA or the Authority) Issuer Rating at A (high) and Commercial Paper (CP) rating at R-1 (low) with Stable trends. The rating confirmations are based on GTAA’s robust liquidity and business risk assessment, the start of recovery in passenger volumes with the easing of travel restrictions in Canada, and the improvement in metrics over the medium term, despite the challenges and uncertainties caused by the containment measures related to the Coronavirus Disease (COVID-19) pandemic that have affected international travel and business travel.

Compared with 50.5 million passengers in 2019, GTAA served only 12.7 million passengers in 2021, a decline of 74.9% from 2019 and a 4.6% decline from 2020 (13.3 million), which included one quarter of aviation activity not affected by the pandemic shutdown, on account of the coronavirus pandemic. Revenues during the period increased slightly to $826.8 million from $823.5 million, an increase of 0.4%. Operating expenses, as calculated by DBRS Morningstar, reduced by 6.7%, and EBITDA increased by 14.2% to $318.4 million from $278.8 million. The negative impact faced by the air carriers also led to changes in certain agreements with them in Q3 2020 to reflect the lower projected activity and reduced overall aeronautical revenues, which have been factored into the projections. Cost reduction measures taken by GTAA included reduction in capital spend in 2021, the continuation of its hiring freeze, and maintaining the temporary closure of the terminal facilities at approximately 20% (40% on 2021). The ground lease to be paid to the Government of Canada (rated AAA with a Stable trend by DBRS Morningstar) was deferred for 2021 with payment to occur over 10 years starting from January 2024, and amounted to $63.5 million as of December 31, 2021. GTAA claimed amounts totalling $28.6 million in 2021 under the Canada Emergency Wage Subsidy program ($48.8 million in 2020), which was available until September 2021. At the end of 2021, total debt, as calculated by DBRS Morningstar, was $7.3 billion—$0.3 billion higher than one year earlier. The debt service coverage ratio (DSCR), as calculated by DBRS Morningstar, has improved compared with the previous year, although it is still less than 1.0 times. Total debt per enplaned passenger increased to $1,146 from $1,052.

Passenger volumes and flights showed a significant improvement in 2022, with the international sector leading the growth, although they are still well below the 2019 levels (passenger activity for H1 2022 was 59.6% of passenger activity from the same period of 2019). Total revenues increased to $666.4 million, and EBITDA increased to $337.8 million during H1 2022. The easing of travel restrictions by governments and the pent-up travel demand positively affect the recovery in 2022, which comes earlier than expected by the sector. This trajectory can also reverse in the near term because of new waves and variants of concern, which may extend travel restrictions. In H1 2022, GTAA continued to prudently manage its operating costs and is now seeking to increase its workforce in order to respond to the increase in travel volume. GTAA has implemented further safety measures to reduce the spread of coronavirus. The aeronautical rates were raised and implemented starting from January 1, 2022. Despite the fact that GTAA is encountering operational and customer issues during the summer of 2022, these reflect and are driven by an increase in passenger volumes that are above and beyond expectations.

On March 14, 2022, Transport Canada announced up to $142.0 million in new funding under the Airport Critical Infrastructure Program and the Airport Biosecurity Infrastructure Stream to help the Authority recover from the effects of the pandemic.

On March 17, 2022, the federal government announced that fully vaccinated international travellers will no longer need to provide a pre-entry COVID-19 test result to enter Canada effective April 1, 2022. This, along with easing of travel restrictions globally, has helped recovery of international volumes so far and will continue to do so in the remainder of 2022. Passenger volumes in 2021 were 25% of 2019 levels, which reflect a much greater improvement than expected by DBRS Morningstar’s base-case forecast (15% of 2019 levels in 2021). For 2022, DBRS Morningstar’s base case considers that passengers will reach 60% with full recovery to 2019 levels in 2025. DBRS Morningstar forecasts the ratings will return to levels appropriate for the A (high) range in 2022 under the DBRS Morningstar base case.

Despite these challenges, DBRS Morningstar still considers liquidity robust, with $1.4 billion liquidity available as of June 30, 2022. This comprises $1.3 billion borrowing capacity under its $1.4 billion Operating Credit Facility (extended until May 31, 2025), $59.9 million available capacity under its $150 million Letter of Credit Facility (extended until May 31, 2023), and unrestricted cash of $60.0 million. Available liquidity is expected to remain at or above $1.3 billion in the period 2022–24. The amount available as of December 31, 2019 (before the onset of the pandemic), was $1.4 billion, with the size of the Operating Credit Facility and Letter of Credit Facility remaining unchanged. In June 2022, GTAA early redeemed the $388 million bonds maturing in September 2022, using cash on hand and issuing $79.9 million of CP. There are no bonds that mature and require refinancing until December 2027.

On July 21, 2021, GTAA obtained consent from the lenders for an amendment to the Master Trust Indenture (MTI), which relieved the Authority from complying with its Rate Covenant, to meet the DSCR and Operating Covenant tests, for the fiscal year 2022, which was previously available for 2020 and 2021 under the July 2020 amendment. During the exemption period, GTAA would disclose if available liquidity was below $200 million at the end of each quarter.

DBRS Morningstar continues to monitor the pandemic and recovery closely and believes that a prolonged impact of the pandemic on the air transport industry as well as GTAA’s business and financial profile could put negative pressure on the Authority’s credit rating. DBRS Morningstar could also take a negative rating action with further material declines in revenues compared with the base case, leading to lower financial metrics that take longer to correspond with the current rating. DBRS Morningstar does not expect a positive rating action over the medium term.

There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

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/396929

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

The principal methodology is Rating Airports (May 25, 2022; https://www.dbrsmorningstar.com/research/397283), which can be found on dbrsmorningstar.com under Methodologies & Criteria. Other applicable methodologies include the DBRS Morningstar Criteria: Commercial Paper Liquidity Support for Nonbank Issuers (March 1, 2022; https://www.dbrsmorningstar.com/research/393065) and the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (May 17, 2022; https://www.dbrsmorningstar.com/research/396929).

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.

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].

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