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

DBRS Limited (Morningstar DBRS) confirmed the Issuer Rating of the Greater Toronto Airports Authority (GTAA or the Authority) at A (high) and its Commercial Paper (CP) rating at R-1 (low), both with Stable trends. The credit rating confirmations are based on GTAA's robust liquidity and business risk assessment, traffic volume that slightly exceeded the forecast in the Morningstar DBRS 2023 rating case, and the improvement in financial metrics, which are commensurate with the A (high) rating.

KEY CREDIT RATING CONSIDERATIONS
During 2023, GTAA processed 44.8 million passengers, 25.8% more than in 2022, recovering to 88.7% of the 2019 total of 50.5 million passengers, above the 86.8% of 2019 passengers expected in Morningstar DBRS' rating case. Growth was driven by strong travel demand, GTAA's ability to deliver more consistent levels of service following previous years' challenges, and the removal of pandemic-associated travel restrictions. Consequently, revenues increased significantly to $1.9 billion in 2023 from $1.5 billion in 2022, an increase of 26.5%, and 24% higher than 2019 revenues. Total operating expenses, as calculated by Morningstar DBRS, increased by 26.4%, mainly because of the increase in ground lease cost as a result of the significant increase in revenues. EBITDA increased by 26.6% to $960.3 million from $758.6 million.

Passenger volumes and flights continued to improve in 2024, reaching a total of 22.7 million passengers as of June 30, 2024, a 6.2% increase from the number of passengers in H1 2023. The international sector continued to lead the growth, although the total number of passengers was still below the 2019 figure (passenger activity in H1 2024 was 92.7% of passenger activity in H1 2019). During H1 2024, total revenues increased by 7.2% to $953.8 million compared with H1 2023, primarily because of the significant growth in passenger and flight activity, while EBITDA increased just 1.3% to $456.4 million as a result of the increase in operating costs because of the new capital program launched in 2023.

Operations at Toronto Pearson International Airport (Pearson) have dramatically improved since the challenges experienced in 2022, which can be attributed to several factors including the launch of the Pearson Standard in 2023, which is helping to improve compliance with service standards across the airport. In addition, GTAA partnered with Assaia to enable Assaia Apron AI, an AI solution that uses computer vision software and cameras at Pearson's gates to track every aspect of aircraft turnaround performance from arrival to departure from gate. The data gathered highlight and address inefficiencies, and provide accurate estimates of timeliness to increase gate availability, improve on-time performance, and be more transparent for passengers. Furthermore, Pearson fully implemented the Airport Collaborative Decision Making platform, a GTAA-led initiative developed in close collaboration with its partners, to share the right information at the right time with the right people to help its partners anticipate aircraft arrivals, prepare aircraft for the next flight, and achieve on-time departures with optimum productivity of resources.

Morningstar DBRS considers GTAA's liquidity to be robust, with $2.1 billion in liquidity available as of June 30, 2024. This comprises $1.1 billion borrowing capacity under the Authority's $1.4 billion Operating Credit Facility (extended until May 31, 2026), $23 million available capacity under its $150 million Letter of Credit Facility (extended until May 31, 2025), and unrestricted cash of $953 million. Available liquidity is expected to remain at or above $1.7 billion in 2024-26. Additionally, GTAA implemented a number of financial risk resilience measures in 2023, including achieving and maintaining cash on hand equal to approximately 300 days of daily operating expenses, which will increase the Authority's ability to withstand disruptions to travel that would drive reduced cash flows. As of December 31, 2023, GTAA has 287 days of cash on hand and is aiming to reach the 300-day cash-on-hand target by the end of 2024. Once the target is hit, GTAA will use cash over and above 300 days to pay for capital and reduce its reliance on CP. There are no bonds that will mature and require refinancing until December 2027. GTAA has issued CP for a total of $287.1 million as of June 30, 2024, in line with its capital spend, and plans to continue to do so until it reaches the 300-day cash-on-hand target.

CREDIT RATING DRIVERS
A material and negative deviation from the Morningstar DBRS 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. Morningstar DBRS does not expect to take a positive rating action over the medium term.

FINANCIALS OUTLOOK
At the end of 2023, total debt, as calculated by Morningstar DBRS, was $7.1 billion, $184 million more than one year earlier. The debt service coverage ratio (DSCR), as calculated by Morningstar DBRS, has improved substantially compared with the previous year to 3.0 times (x) and total debt per enplaned passenger reduced to $315 from $386, which is commensurate with the current ratings.

Morningstar DBRS 's base-case scenario assumes that passenger traffic will reach 93% of 2019 levels by the end of 2024, and full recovery by the end of 2025. Morningstar DBRS expects the DSCR to decrease to 2.9x in 2024 and then gradually improve with further traffic recovery, remaining at or above 3.0x in the near future. Debt per enplaned passenger is expected to decrease to $303 in 2024, and continue improving in 2025 as more passengers return, then to increase to $310 in 2026 as a result of increased debt.

CREDIT RATING RATIONALE
The credit ratings reflect the Authority's financial outlook, underpinned by strengths that include its (1) unregulated ability to set fees to recover costs, (2) virtual monopoly over airport services, (3) service area with strong economic fundamentals, and (4) status as Canada's primary international gateway. The challenges include (1) the inherent volatility in air travel industry, (2) GTAA's high exposure to a single air carrier, and (3) its expensive federal ground rent.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (January 23, 2024) at https://dbrs.morningstar.com/research/427030.

BUSINESS RISK ASSESSMENT (BRA) AND FINANCIAL RISK ASSESSMENT (FRA)
(A) Weighting of BRA Factors
-- In the analysis of GTAA, the BRA factors are considered in the order of importance contemplated in the methodology.

(B) Weighting of FRA Factors
-- In the analysis of GTAA, the FRA factors are considered in the order of importance contemplated in the methodology.

(C) Weighting of the BRA and the FRA
-- In the analysis of GTAA, the BRA carries greater weight than the FRA.

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

Morningstar DBRS applied the following principal methodology:
-- Rating Airports (April 15, 2024), https://dbrs.morningstar.com/research/431206

The following methodologies have also been applied:
-- Morningstar DBRS Global Corporate Criteria (April 15, 2024), https://dbrs.morningstar.com/research/431186
-- Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (January 23, 2024), https://dbrs.morningstar.com/research/427030

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

A description of how Morningstar DBRS analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/431153.

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-DBRS@morningstar.com.

The credit rating was initiated at the request of the rated entity.

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

Morningstar DBRS had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this credit 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. Morningstar DBRS trends and credit ratings are under regular surveillance.

Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available on dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.

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