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 rating at R-1 (low) with Stable trends. The rating confirmations are based on GTAA’s robust liquidity and business risk assessment, expected start of recovery in passenger volumes with the easing of travel restrictions in Canada, and improvement in metrics over the medium term, despite the challenges and uncertainties caused by the containment measures related to the Coronavirus Disease (COVID-19) pandemic that have affected international travel and business travel.

Compared with 50.5 million passengers in 2019, GTAA served only 13.3 million passengers in 2020, a decline of 73.6%, on account of the coronavirus pandemic. Revenues during the period declined to $823.5 million from $1,521.3 million, a decline of 45.9%. Operating expenses, as calculated by DBRS Morningstar, reduced by 31.5% and EBITDA declined 61.6% to $278.8 million from $725.9 million. The negative impact faced by the air carriers also led to changes in certain agreements with them in Q3 2020 to reflect the lower projected activity and reduced overall aeronautical revenues, which have been factored into the projections. Cost reduction measures taken by GTAA included reduction in capital spend by approximately $265 million in 2020, the reduction of staff of approximately 27% in July 2020, and temporary closure of more than 40% of the terminal facilities. The ground lease to be paid to the Government of Canada (rated AAA with a Stable trend by DBRS Morningstar) was waived from March 2020 to December 2020 (approximately $73 million), while the lease for 2021 is deferred with payment to occur over 10 years starting from January 2024. Amounts totalling $48.8 million were claimed by GTAA in 2020 under the Canada Emergency Wage Subsidy program, which is currently available until September 2021. At the end of 2020, total debt was $7.0 billion, $0.6 billion higher than one year earlier. The debt service coverage ratio (DSCR), as calculated by DBRS Morningstar, was less than 1.0 times (x), decreasing from 2.2x in 2019. Total debt per enplaned passenger increased to $1,052 from $254.

Passenger volumes and flights continued to be affected in 2021, exhibiting an 88.8% decrease in passenger volumes in Q1 2021, with the international sector decrease higher than the domestic sector decrease. Total revenues reduced by 55.1% to $152.1 million and EBITDA reduced by 77.8% year over year to $34.4 million during Q1 2021, compared with Q1 2020. The evolving coronavirus pandemic situation, including the detection of more contagious variants, and further containment measures (e.g., a mandatory quarantine for international travellers, negative test results, and the suspension of flights to certain regions) negatively affect the recovery in 2021. In Q1 2021, GTAA continued to reduce its operating and capital expenditures, including the continuation of a hiring freeze and a further reduction in capital spending, and provided further financial accommodation to the key commercial partners through payment deferrals to be paid within 2021 and 2022. GTAA has implemented a series of safety measures to reduce the spread of coronavirus. The aeronautical rates were raised, and the airport improvement fee was implemented starting from January 1, 2021.

On July 5, 2021, some of the procedures were relaxed in Canada for fully vaccinated Canadians and permanent residents. Considering the proportion of people vaccinated in Canada and the easing of travel restrictions, there could be recovery in volumes in the remainder of 2021. Recent public announcements have stated that travel may be allowed to Canada from the U.S. in August and from other countries by September. The recovery of international volumes is also linked to travel restrictions in other regions, which causes additional uncertainty. While passenger volumes in 2020 were 26% of 2019 levels, DBRS Morningstar’s base-case forecast considers passengers to be only 15% in 2021, increasing to 43% in 2022 and 64% in 2023. Although DBRS Morningstar previously forecast the ratings to return to levels appropriate for the A (high) range in 2021, that is now only expected in 2022 under the DBRS Morningstar base case.

Despite these challenges, liquidity is still considered robust by DBRS Morningstar, with $1.33 billion liquidity available as of March 31, 2021. This comprises $1.1 billion borrowing capacity under its $1.4 billion Operating Credit Facility, $67.8 million available capacity under its $150 million Letter of Credit Facility, and unrestricted cash of $113.2 million. The amount available as of December 31, 2019 (before the onset of the pandemic) was $1.41 billion, with the size of the Operating Credit Facility and Letter of Credit Facility remaining unchanged. There are no bonds that mature and require refinancing until September 2022.

GTAA obtained consent from the lenders for amendment to the Master Trust Indenture (MTI), which relieved the Authority from complying with its Rate Covenant, to meet the DSCR and Operating Covenant tests, for the fiscal year 2022, which was previously available for 2020 and 2021 under the July 2020 amendment. During the exemption period, GTAA would disclose if available liquidity is below $200 million at the end of each quarter. The extension was sought to protect against the impact on the Operating Covenant given the pandemic-related uncertainty and to manage liquidity with the requirement to transfer funds from the DSCR test being able to be pushed to 2024. Additionally, GTAA obtained consent to amend the limitation on guarantees and investments under the MTI, from 5% of the accumulated surplus, to the greater of 3% of total assets and $200 million under the MTI, in line with GTAA’s plans to diversify its revenues to mitigate the impact of future shocks.

DBRS Morningstar continues to monitor the pandemic and recovery closely and believes that a prolonged impact of the pandemic on the air transport industry as well as GTAA’s business and financial profile could put negative pressure on the Authority’s credit rating. DBRS Morningstar could also take a negative rating action with further material declines in revenues compared with the base case, leading to lower financial metrics that take longer to correspond with the current rating. DBRS Morningstar does not expect a positive rating action over the medium term.

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/373262.

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

The principal methodology is Rating Canadian Airport Authorities (April 7, 2021, https://www.dbrsmorningstar.com/research/376410), which can be found on dbrsmorningstar.com under Methodologies & Criteria. Other applicable methodologies include the DBRS Morningstar Criteria: Commercial Paper Liquidity Support for Nonbank Issuers (March 9, 2021, https://www.dbrsmorningstar.com/research/375001) and the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021, https://www.dbrsmorningstar.com/research/373262).

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

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@dbrsmorningstar.com.

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.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.

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