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 continue to 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 from the pandemic, which may be interrupted by additional waves of infection triggering extended lockdowns and border closures. The recovery could also be slowed down by potential negative impact of high inflation and fuel prices effecting both airlines and travelers as well as the labor shortage currently experienced by many Canadian airports.

Total passenger volume reached 7.1 million in 2021, compared with 7.3 million in 2020, and was approximately 27% of that in 2019, but better than DBRS Morningstar’s expectation. During 2021, the Authority reported total revenue of $273.4 million and total EBITDA of $40.9 million, 48.0% and 15.7% of the 2019 levels, respectively. With no new debenture issued in 2021, total debt by the end of year remained essentially unchanged from the previous year at approximately $1.5 billion, or $426 per enplaned passenger, which is still significantly higher than the $68 per enplaned passenger at YE2019. The DBRS Morningstar-adjusted interest coverage ratio (ICR) dropped to 0.8 times (x) in 2021, compared with 1.7x in 2020 and 8.3x in 2019. DBRS Morningstar noted that, pursuant to the ninth supplemental indenture dated September 11, 2020, debenture holders agreed to waive potential breaches of certain ICR requirements through 2022.

Similar to what DBRS Morningstar has observed at other Canadian airports, traffic recovery at VAA was interrupted by the public health restrictions imposed in December 2021 because of the arrival of the omicron variant, although recovery has resumed since late Q1 2022 as those restrictions were lifted. During H1 2022, VAA served a total of approximately 7.7 million passengers, or 61% of the traffic volume during the same period in 2019. The monthly traffic volumes in June 2022 for the domestic, transborder, and international segments reached 95%, 74%, and 60% of the respective segment volumes in June 2019.

Conservatively assuming some tightening of public health restrictions again in fall 2022, management forecasts a total of 14.2 million passengers for 2022, or 54% of the 2019 level, and full volume recovery in 2025, which DBRS Morningstar considers reasonable (DBRS Morningstar’s base-case traffic forecast). Under this scenario, DBRS Morningstar expects VAA’s major financial metrics to prove supportive of the current ratings by the end of 2022 and then continue improving with further traffic recovery.

The Authority incurred $126.3 million in capital expenditure (capex) during 2021, substantially lower than the $395.4 million in 2020. VAA’s updated capex plan entails an estimated spending of approximately $850 million between 2022 and 2025, to be incurred at a relatively equal amount in each year. The majority of capex will be dedicated to maintaining or renewing existing assets while ensuring safety and regulatory compliance. VAA does not anticipate raising additional debentures between 2022 and 2025, lending some support to the credit rating.

Capital outlays are expected to be mainly funded by internally generated cash. Cash balance is expected to remain relatively stable at around $200 million between 2023 and 2025. VAA also has a $450 million credit facility, of which approximately $421 million remains available to date, with the balance allocated for the letters of credit to support post-retirement benefits. DBRS Morningstar expects VAA to have adequate liquidity to cover all operational and financial expenditures under the DBRS Morningstar base-case traffic forecast scenario.

DBRS Morningstar may change the trends to Stable if 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 has sufficiently recovered could result in a negative rating action.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance (ESG) 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: 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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