Morningstar DBRS Confirms Aéroports de Montréal's Issuer Rating and Revenue Bonds Credit Rating at A (high) with Stable Trends

DBRS Limited (Morningstar DBRS) confirmed the Issuer Rating and Revenue Bonds credit rating of Aéroports de Montréal (ADM) at A (high) with Stable trends. The credit rating confirmations are underpinned by ADM's strong financial performance in 2023 and H1 2024, on the backdrop of solid growth in passenger traffic in the transborder and international segments. In addition, the confirmation stems from Morningstar DBRS' view that despite a projected material increase in capital investments in 2024-28 to expand ADM's infrastructure capacity, ADM's financial performance is likely to remain supportive of its current credit ratings.

KEY CREDIT RATING CONSIDERATIONS
ADM's traffic performance in 2023 and in H1 2024 exceeded our expectations. Despite uncertainty in the economy and high air fares, the demand for travel in the transborder and transatlantic segments have proven to be very resilient. As a result, total passenger traffic in 2023 exceeded the 2019 level by more than 4%. In H1 2024, Morningstar DBRS continues to see solid passenger growth in the transborder and international segments with year-over-year growth rates of 12.9% and 12.4%, respectively. In contrast, the domestic passenger growth in H1 2024 was -0.4% compared with the same period in 2023. The passenger traffic in the domestic segment may still be suffering from the lingering effects of the coronavirus pandemic. For example, virtual business meetings remain a popular alternative to in-person meetings and this may have negatively affected travel between Toronto and Montréal.

Nevertheless, transborder and international passenger traffic accounted for nearly 70% of total passenger traffic in 2023. This is a notable increase compared with 65% in 2019. Morningstar DBRS believes the robust growth in the transborder and international segments coupled with a relatively slower recovery in the domestic segment, have temporarily changed the traffic mix at ADM.

Morningstar DBRS also notes that the passenger mix at ADM is heavily weighted toward the leisure and visiting friends and relatives (VFR) segments. Therefore, ADM has benefitted greatly from the unprecedented demand for leisure and VFR travel in the past couple of years. This resulted in EBITDA increasing by more than 35% in 2023 and more than 10% in H1 2024 over the same period in 2023. As a result of the positive growth in EBITDA coupled with relatively stable debt balance in 2023, the debt service coverage ratio (DSCR, as calculated by Morningstar DBRS) improved to 3.6 times (x) from 2.2x in 2022. Debt per enplaned passenger ratio (as calculated by Morningstar DBRS) lowered to $270 in 2023 from $360 in 2022.

In order to accommodate future passenger growth (more than 25 million passengers by 2028), ADM plans to increase its capital investments considerably in the next several years with a focus on reconfiguring and expanding the landside (e.g., pickup/drop-off areas, car parking) capacity. Total capital investments in 2024-28 is projected to be close to $4.0 billion. ADM plans to use its large cash balance (cash and short-term investments of nearly $630 million as of June 30, 2024), existing credit facilities, and additional debt to fund the upcoming large-scale projects.

Despite an expected increase in leverage in the next several years, Morningstar DBRS believes ADM's financial strength remains supportive of its current credit ratings. In Morningstar DBRS' projection, ADM's debt per enplaned passenger ratio will likely trend higher from its 2023 level and it may exceed $360 by 2028. In addition, the DSCR will likely decline from its 2023 level and may reach nearly 2.0x by 2028. Morningstar DBRS notes that ADM's 2024-28 Strategic Plan has yet to be finalized, and, as a result, the sequencing of the capital projects may shift. Therefore, the DSCR and leverage profiles may change from Morningstar DBRS' base-case scenario.

CREDIT RATING DRIVERS
A positive credit rating action is unlikely at the current debt projection. Morningstar DBRS believes a negative credit rating action may occur if passenger traffic level severely underperforms against projection and/or ADM increases its financial leverage significantly more than our expectations without a corresponding increase in revenue and passenger traffic to support the additional financial leverage.

FINANCIAL OUTLOOK
Based on the H1 2024 passenger traffic performance, Morningstar DBRS believes ADM's projection of 22.4 million passengers by the end of 2024 is reasonable. This is an increase of about 5.7% from 2023. Based on the passenger traffic growth assumption, total revenue in 2024 is projected to increase by about 7.9%. However, total operating expense in 2024 is projected to rise by more than 15%. This increase is mainly attributable to mitigation measures to manage traffic flow on the city-side, operating costs for passenger services as well as professional fees related to medium- and long-term plans for airport infrastructures. In addition, Transport Canada rent is also projected to increase by more than 10% in 2024 because of a projected increase in total revenue.

As a result, EBITDA is projected to decline modestly in 2024. ADM's DSCR (as calculated by Morningstar DBRS), is projected to decrease to about 3.1x in 2024 from 3.6x in 2023. The decrease in DSCR is also a result of higher projected debt service payments in relation to drawing on the senior subordinated credit facilities from Investissement Québec and Canada Infrastructure Bank in relation to the Réseau Express Métropolitain transit station project in 2024. In addition, debt per enplaned passenger ratio is projected to rise to $271 in 2024.

CREDIT RATING RATIONALE
The credit rating strengths of ADM is underpinned by (1) legislative ability to adjust fees to recover costs; (2) virtual monopoly in the Montréal region; (3) high origination and destination passenger mix and air traffic diversification; (4) revenue diversification from commercial operations; and (5) a large economic region. The challenges are (1) sensitivity to various global disruptive events and economic cycles; (2) high exposure to a single air carrier; (3) relatively heavy municipal tax burden; and (4) close proximity to Ottawa creating competition for passenger traffic.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factor(s) 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 Factors in Credit Ratings (August 13, 2024), https://dbrs.morningstar.com/research/437781.

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

(B) Weighting of FRA Factors
In the analysis of ADM, 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 ADM, 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

Morningstar DBRS credit ratings may use one or more sections of the Morningstar DBRS Global Corporate Criteria (April 15, 2024), https://dbrs.morningstar.com/research/431186 which covers, for example, topics such as holding companies and parent/subsidiary relationships, guarantees, recovery, and common adjustments to financial ratios.

The following criteria has also been applied:
DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (13 August 2024), https://dbrs.morningstar.com/research/437781/morningstar-dbrs-criteria-approach-to-environmental-social-and-governance-factors-in-credit-ratings

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 ratings were initiated at the request of the rated entity.

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

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

These are solicited credit ratings.

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 https://dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.

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