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), both with Stable trends. The rating confirmations are based on GTAA’s robust liquidity and business risk assessment, traffic volume exceeding the forecast in the DBRS Morningstar rating case for 2022, and the improvement in financial metrics, which are commensurate with the rating level.

In 2022, GTAA served 35.6 million passengers, recovering to 71% of the 2019 total of 50.5 million passengers, higher than the 60% expected in DBRS Morningstar’s rating case. Growth was driven by the easing of the pandemic-associated travel restrictions, and pent-up travel demand, with the international sector leading the growth. Consequently, revenues during the period increased significantly to $1.5 billion from $826.8 million in 2021, an increase of 80%, recovering to 98% of 2019 revenues. Total operating expenses, as calculated by DBRS Morningstar, increased by 44.2%, mainly because of the increase in ground lease cost, which is based on a set percentage of GTAA’s revenues and was not deferred for 2022. EBITDA increased by 138.4% to $758.6 million from $318.4 million.

The negative impact of pandemic-related travel restrictions faced by the air carriers also led to changes in certain agreements between them and GTAA in Q3 2020 to reflect the lower projected activity and reduced overall aeronautical revenues. During 2022 air carriers paid, and will pay in 2023, revised amounts which have been factored into the projections. At the end of 2022, total debt, as calculated by DBRS Morningstar, was $6.9 billion, $0.4 billion lower than one year earlier. The debt service coverage ratio (DSCR), as calculated by DBRS Morningstar, has improved substantially compared with the previous year to 2.1 times (x) and total debt per enplaned passenger reduced to $386 from $1,146, which is commensurate with the current ratings.

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. As of June 30, 2023, GTAA has received $89.5 million under this program, $65.2 million of which have already been claimed to date, and the remaining $24.3 million will be allocated to airside restoration.

Passenger volumes and flights continued to improve in 2023, reaching a total of 21.2 million passengers as of June 30, 2023, a 46.1% increase compared with H1 2022. The international sector continues to lead the growth, although total passengers are still below the 2019 levels (passenger activity for H1 2023 was 86.8% of passenger activity from the same period of 2019). Total revenues increased to $889.4 million and EBITDA increased to $450.5 million during H1 2023 primarily because of the significant growth in passenger and flight activity. The aeronautical rates were raised and implemented starting from January 1, 2023.

Operations at Toronto Pearson International Airport (Pearson) have dramatically improved since 2022, which can be attributed to digital and technological innovations, such as the YYZ Express program, mobile passport control, and advance declaration, as well as additional personnel. GTAA increased its workforce to be able to serve current travel demands by recalling employees who had been laid off earlier in the pandemic or who were on leaves of absence because of the mandatory vaccination policy, or by hiring new staff. Also, air carriers and government agencies have hired additional staff and are actively collaborating across the ecosystem at Pearson to ensure stability and resiliency during the busy season. In 2023, GTAA launched a new 10-year strategic plan that focuses on customer experience, operational efficiency, and innovation.

DBRS Morningstar’s base-case scenario assumes that passenger traffic will reach 87% of 2019 levels by the end of 2023, but expects slower growth because of the uncertainty in the macroeconomic environment and the limited extent of business travel recovery. Full recovery is expected by the end of 2025. DBRS Morningstar expects DSCR to reach 2.6x in 2023 and then gradually improve with further traffic recovery. Debt per enplaned passenger is expected to decrease to $326 in 2023 and continue improving as more passengers return.

DBRS Morningstar considers GTAA's liquidity to be robust, with $1.8 billion liquidity available as of June 30, 2023. This comprises $1.3 billion borrowing capacity under the Authority's $1.4 billion Operating Credit Facility (extended until May 31, 2026), $37 million available capacity under its $150 million Letter of Credit Facility (extended until May 31, 2024), and unrestricted cash of $417.0 million. Available liquidity is expected to remain at or above $1.7 billion in 2023–25. Additionally, the Authority has recently implemented a number of new financial risk resilience measures including achieving and maintaining a target cash on hand equal to approximately 300 days of daily operating expenses. For that purpose, GTAA has issued CP for a total of $79.9 million as of June 30, 2023, in line with its capital spend, and plans to continue to do so until it reaches the 300-day cash on hand target. Once the target is hit, GTAA will use cash over and above 300 days to pay for capital and reduce reliance on CP. There are no bonds that mature and require refinancing until December 2027.

A material and negative deviation from the DBRS Morningstar base-case scenario forecast could result in a negative rating action. Additionally, a material change in GTAA's internal guidelines on the CP program could have a negative impact on the CP rating. DBRS Morningstar does not expect to take a positive rating action over the medium term.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
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/416784 (July 4, 2023).

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

DBRS Morningstar applied the following principal methodology:
-- Rating Airports (March 28, 2023) https://www.dbrsmorningstar.com/research/411562/rating-airports

Other applicable methodologies include the DBRS Morningstar Criteria: Commercial Paper Liquidity Support for Nonbank Issuers (February 24, 2023; https://www.dbrsmorningstar.com/research/410196/dbrs-morningstar-global-criteria-commercial-paper-liquidity-support-for-nonbank-issuers)

The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

A description of how DBRS Morningstar analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/397223 .

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 rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the rating process for this rating action.

DBRS Morningstar had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

This is a solicited credit rating.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.

Information regarding DBRS Morningstar ratings, including definitions, policies, and methodologies, is available on www.dbrsmorningstar.com or contact us at [email protected].

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