Morningstar DBRS Confirms Vancouver Airport Authority's Issuer Rating and Senior Debentures at AA (low) With Stable Trends

DBRS Limited (Morningstar DBRS) confirmed Vancouver Airport Authority's (VAA or the Authority) Issuer Rating and Senior Debentures credit rating at AA (low), both with Stable trends. The credit ratings remain supported by the economic strength of the service area, relatively competitive aeronautical fees, robust passenger services, and the satisfactory traffic volume recovery from the COVID-19 pandemic.

KEY CREDIT RATING CONSIDERATIONS
Total passenger volume reached 24.9 million in 2023, compared with 19.0 million in 2022 and 7.1 million in 2021, and was almost 95% of 2019 passenger volume, better than Morningstar DBRS' expectation. During 2023, the Authority reported total revenue of $631.6 million and total EBITDA of $265.7 million, 111.5% and 102.8% of 2019 levels, respectively. With no new debentures issued in 2023, total debt by YE2023 remained essentially unchanged from the previous year at approximately $1.5 billion. Total debt per enplaned passenger continued to improve with traffic volume recovery, reaching $121 per enplaned passenger at YE2023, lower than $159 in 2022 but still notably higher than $68 at YE2019. The Morningstar DBRS-adjusted debt service coverage ratio (DSCR) rose to 5.0 times (x) in 2023 from 3.7x in 2022, still lower than 8.2x in 2019.

Traffic volume recovery continued in 2024, reaching approximately 12.6 million passengers during H1 2024, or 99% of the traffic volume during the same period in 2019. Total year-to-date traffic volumes as of June 30, 2024, for the domestic, transborder, and international segments reached 101%, 102%, and 94% of the respective segment volumes in June 2019. The Asia-Pacific sector is still lagging, partly because of the air-bilateral restrictions currently in place between Canada and China.

The Authority incurred $238.2 million in capital expenditure (capex) during 2023, which was in line with expectations and fully funded by internally generated cash flows. About two-thirds of the capex was for repairs, compliance, or safety-related projects. VAA's current capex plan entails estimated annual spending of around $300 million in 2024 and 2025 and $250 million between 2026 and 2028. The majority of the capex during 2024-25 will be dedicated to completing certain large strategic priorities, including the North Runway upgrade project. Thereafter, the capex will be mainly for sustaining existing assets, investing in digital technologies, and enhancing revenue diversification, while ensuring safety and regulatory compliance.

VAA plans to finance the above capital outlays primarily with cash or cash flows from operations. Under the base-case traffic forecast scenario and the current capex plan, and assuming VAA will refinance the Series B Senior Debentures (due in December 2026) and maintain its cash balance above $100 million, Morningstar DBRS does not expect VAA to raise any incremental external debts through 2028. The Authority is finalizing its strategic plan for the next three years but does not expect the finalized plan would materially increase the total capex currently assumed during 2025-28. Morningstar DBRS further notes that any updated capex plan will still be subject to the Authority's annual capital project reviews and can be adjusted accordingly.

CREDIT RATING DRIVERS
A credit rating upgrade is unlikely in the near term as VAA's fundamental business risk assessment is unlikely to improve materially above the current credit rating level. While not expected, the credit ratings may be negatively affected should the traffic outlook become materially negative over the medium term or if the Authority's debt increases materially without commensurate volume growth.

FINANCIAL OUTLOOK
Management currently forecasts a total of approximately 26.0 million passengers for 2024, or 99% of the 2019 level, and a full traffic volume recovery in 2025 (the base-case traffic forecast). To make Vancouver International Airport more resilient in the post-pandemic environment, the Authority decided through a comprehensive review in 2023 to accelerate operational investments and will further boost its workforce in 2024. The additional full-time equivalents will be for airport operations, airport development and asset optimization, passenger experience enhancement, and various corporate functions. As a result, in 2024, total operational expenses are forecast to rise 26%, temporarily pressing EBITDA down to approximately $220 million and DSCR to around 4.1x. The investments in operations are built into the cost base, with no further material increase expected in the near term as the organization focuses on its next three-year strategy, which includes optimizing and diversifying revenues.

Under the base-case traffic forecast and assuming a 3% year-over-year increase in landing and terminal fees but without an increase in airport improvement fees, Morningstar DBRS expects that VAA's major financial metrics will continue to support the current credit ratings and will gradually improve and approach pre-pandemic levels by 2028. Thereafter, any material increase in traffic volume may drive up expansionary capex, depending on VAA's future strategy to optimize its capacity and operations.

Morningstar DBRS expects VAA to have adequate liquidity to cover all operational and financial expenditures under the base-case traffic forecast scenario. The Authority reported a total cash balance of $311.7 million as of June 30, 2024, and forecast it will decrease to approximately $260 million by YE2024. Morningstar DBRS expects that the Authority's cash balance will further decline until 2026 as it is being gradually used to fund capital outlays. VAA maintains a $300 million revolving credit facility, of which approximately $282 million remained available as at June 30, 2024, with the balance allocated for letters of credit to support post-retirement benefits. Morningstar DBRS understands that the Authority intends to maintain a minimum of $100 million undrawn capacity under the credit facility to reinforce its liquidity. Further, Morningstar DBRS draws comfort from the Authority's conservative management and relatively low airport improvement fees, which can potentially be increased to help fund future capital needs.

CREDIT RATING RATIONALE
VAA's credit rating strengths are underpinned by its (1) unfettered rate-setting ability and comparatively low aeronautical fees, (2) strategic location, (3) position as the predominant provider of airport services in Vancouver, and (4) relatively low debt burden. The challenges are (1) VAA's sensitivity to various global disruptive events and economic cycles, (2) its high exposure to a single airline, and (3) competition for trans-Pacific passengers.

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 Factors in Credit Ratings (August 13, 2024) at https://dbrs.morningstar.com/research/437781.

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

(B) Weighting of FRA Factors
In the analysis of VAA, the FRA factors were considered in the order of importance contemplated in the methodology.

(C) Weighting of the BRA and the FRA
In the analysis of VAA, 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:
-- Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (August 13, 2024), https://dbrs.morningstar.com/research/437781

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 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.

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

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