DBRS Morningstar Upgrades Aéroports de Montréal’s Issuer Rating and Revenue Bonds Rating to A (high) from “A” and Changes Trends to Stable

DBRS Limited (DBRS Morningstar) upgraded the Issuer Rating and Revenue Bonds rating of Aéroports de Montréal (ADM or the Authority) to A (high) from "A." At the same time, DBRS Morningstar changed the trends to Stable from Positive. The rating upgrades stem from DBRS Morningstar's view that ADM's financial performance has improved significantly on the backdrop of significant pent-up demand for air travel that began in February/March 2022 despite ongoing macroeconomic challenges and high air fares. DBRS Morningstar believes ADM's annual passenger traffic could reach the 2019 level by the end of 2023 and the projected debt per enplaned passenger could fall to below $300.

In 2024–27, DBRS Morningstar projects ADM’s passenger traffic growth to stabilize and grow at a lower rate than in 2022–23. Furthermore, DBRS Morningstar expects ADM’s financial metrics to be relatively weaker in 2024–27 because of a projected increase in financial leverage as a result of a material increase in capital investments. Nonetheless, DBRS Morningstar believes the overall credit fundamentals of ADM remain in the A (high) rating level.

Air passenger traffic at ADM recovered swiftly in 2022 after two consecutive years of depressed air passenger traffic levels. Total passenger traffic reached nearly 16.0 million passengers in 2022, an increase of more than 200% compared with 2021. From a recovery perspective, total passenger traffic reached nearly 80% of the 2019 level, which is a sharp rebound from 26% in 2021. In particular, the speed of recovery for international passenger traffic has outpaced that of domestic and transborder passenger traffic. By the end of 2022, international passenger traffic recovered to about 83% of the 2019 level (22% in 2021), ahead of transborder and domestic passenger traffic at nearly 77% (19% in 2021) and around 75% of the 2019 levels (34% in 2021), respectively.

With the significant increase in total passenger traffic in 2022, ADM's financial performance has significantly improved compared with 2021. Total revenue increased to $652.1 million from $277.7 million in 2021, an increase of more than 134%. Concurrently, total operating expenses in 2022 have increased to $328.2 million from $214.1 million in 2021. Overall, the strong recovery in air travel in 2022 resulted in ADM's EBITDA, as calculated by DBRS Morningstar, to increase to $323.9 million (92% of the 2019 level) from $63.6 million in 2021 (18% of the 2019 level).

ADM's cash and cash equivalents rose to $550.2 million in 2022 from $417.9 million in 2021. The boost in liquidity was due to the increase in operating cash flow, which in turn was related to the increase in operating activities.

For H1 2023, total passenger traffic reached 9.8 million passengers, an increase of more than 57% compared with the same period in 2022. From a recovery perspective, this level of passenger traffic is equivalent to 102% of the same period in 2019. For the same period, international, transborder, and domestic traffic volume was 112%, 101%, and 90% of the 2019 levels, respectively. DBRS Morningstar notes the pace of recovery has notably increased in all market segments in H1 2023 despite macroeconomic headwinds and high air fares. DBRS Morningstar believes the pent-up demand in leisure travel is unlikely to soften in the summer months this year because it is the first summer without any travel restrictions related to the Coronavirus Disease (COVID-19).

ADM reported EBITDA of $193.5 million in H1 2023, an increase of more than 65% over the same period in 2022. The debt service coverage ratio (DSCR), as calculated by DBRS Morningstar, was 3.1 times (x), and debt per enplaned passenger fell to below $300. In H1 2023, ADM's liquidity remains solid with cash and short-term investments of about $564.5 million.

DBRS Morningstar believes ADM's annual total passenger traffic could fully recover to the 2019 level, reaching more than 20 million passengers in 2023. Under DBRS Morningstar's base-case scenario, ADM's debt per enplaned passenger in 2023 will fall to below $300 from about $360 in 2022, and the DSCR, as calculated by DBRS Morningstar, will remain above 2.0x (similar to the 2022 level).

DBRS Morningstar believes the pent-up demand for air travel that has been on display since early 2022 is unlikely to be sustainable in the medium term. DBRS Morningstar believes the lagged effects of monetary tightening will fully hit the North America economy in H2 2023, causing a slowdown. As a result, consumers will eventually need to reign in on their spending activities and may limit leisure travel.

At this time, DBRS Morningstar believes total passenger traffic will continue to grow in 2024–27 but at a slower pace compared with 2022–23. International Air Transport Association's Global Outlook for Air Transport in June 2023 noted that the demand for air travel will face challenges in the near term that also affect household income, and the risks remain tilted to the downside. Under DBRS Morningstar's base-case scenario, total passenger traffic will grow on average at about 3.3% annually in 2024–27.

According to ADM's current capital plan in 2024–27, the Authority expects to spend nearly $700 million on average annually. This is a material increase from the historical average as ADM will be undertaking some sizable capital programs that, in DBRS Morningstar's view, will require additional future borrowings. Based on DBRS Morningstar's base-case assumptions and in addition to ADM's current capital plan in 2024–27, DBRS Morningstar projects the debt per enplaned passenger will increase to more than $400 as the Authority increases its financial leverage to finance its capital programs. At the same time, DBRS Morningstar projects DSCR to decline to below 1.4x in 2027 from 2.2x in 2022.

Despite the weaker projected financial metrics, DBRS Morningstar believes the overall credit fundamentals of ADM remain in the A (high) rating for several reasons. First, DBRS Morningstar notes that ADM's current capital investment projection in 2024–27 entails a substantial amount of maintenance capital expenditure that can be reduced to a level that meets the regulatory and safety requirements. This flexibility was demonstrated during the pandemic and alleviated some of the financial pressure that ADM experienced during that time. Second, ADM manages its development-related infrastructure projects by using a modular approach. This approach allows ADM to delay a certain portion of a given project in the event of an economic downturn or other events such as the pandemic. For instance, from April 2020 to December 2020, ADM was able to reduce its budgeted capital programs to $130 million from $450 million in light of a severely depressed passenger traffic level. ADM further reduced its budgeted capital programs in 2021 to $51 million from $761 million (budgeted amount prior to the pandemic). Third, DBRS Morningstar still believes ADM is a key hub for international travel between Canada and Europe. ADM's market position in the service area remains strong, and there are virtually no other alternative airports nearby that have the same capacity as that of ADM. Fourth, similar to other Canadian airport authorities, ADM can raise aeronautical fees to remain commercially viable, giving it substantial flexibility to manage adverse financial shocks.

DBRS Morningstar believes a negative rating action may occur if passenger traffic levels severely underperform against DBRS Morningstar's base-case scenario and/or ADM increases its financial leverage significantly more than DBRS Morningstar's expectations without a corresponding increase in revenue and passenger traffic to support the additional financial leverage. A positive rating action is unlikely at the current debt projection.

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 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/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (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

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/interplay-of-global-corporate-finance-rating-methodologies-when-analyzing-corporate-finance-transactions.

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 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.

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 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. DBRS Morningstar trends and ratings are under regular surveillance.

DBRS Morningstar will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving this report, contact us at info@dbrsmorningstar.com.

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