DBRS Morningstar Confirms Vancouver Airport Authority’s Ratings at AA (low), Stable Trends

DBRS Limited (DBRS Morningstar) confirmed Vancouver Airport Authority’s (VAA or the Authority) Issuer Rating and Senior Debentures rating at AA (low). Trends remain Stable. The credit ratings remain supported by stable fundamental credit drivers, such as the economic strength of the service area, as well as the satisfactory traffic volume recovery from the Coronavirus Disease (COVID-19) pandemic.

As travel restrictions in most of the world were lifted, passenger travel quickly resumed. Total passenger volume reached 19.0 million in 2022, compared with 7.1 million in 2021 and 7.3 million in 2020, better than DBRS Morningstar's expectation. During 2022, the Authority reported total revenue of $492.3 million and total EBITDA of $198.2 million, 86.9% and 75.8% of 2019 levels, respectively. With no new debentures issued in 2022, total debt by YE2022 remained essentially unchanged from the previous year at approximately $1.5 billion, or $159 per enplaned passenger, which is significantly lower than the $426 in 2021 but still notably higher than the $68 per enplaned passenger at YE2019. DBRS Morningstar-adjusted interest coverage ratio (ICR) rose to 3.7 times (x) in 2022, compared with 0.8x in 2021 and 1.7x in 2020, but lower than 8.3x in 2019.

Traffic volume recovery continued in 2023. Total year-to-date volume reached approximately 14.2 million passengers as of July 31, 2023, or 93% of the traffic volume during the same period in 2019. Monthly traffic volumes in July 2023 for the domestic, transborder, and international segments reached 100%, 91%, and 81% of the respective segment volumes in July 2019. DBRS Morningstar notes that the Asia Pacific sector has recovered significantly in 2023; however, this sector is still lagging partly because of the air-bilateral restrictions currently in place between Canada and China.

Assuming no new public health restrictions that would have a significant and negative impact on the travel industry, management forecast a total of approximately 24 million passengers for 2023, or 92% of the 2019 level, and a full volume recovery in 2025, which DBRS Morningstar considers reasonable (DBRS Morningstar base-case traffic forecast). Under this scenario, DBRS Morningstar expects VAA’s major financial metrics will continue to support the current credit ratings and will gradually improve with further traffic recovery.

The Authority incurred $140.6 million in capital expenditure (capex) during 2022, which was fully funded by internally generated cash flows. This is in line with the $126.3 million spent in 2021 but much lower than the $395.4 million incurred in 2020. VAA’s updated capex plan entails an estimated spending of around $300 million per year between 2023 and 2027, which will be subject to the Authority’s annual capital project reviews and can be adjusted accordingly. The majority of capex will be dedicated to maintaining or renewing existing assets while ensuring safety and regulatory compliance. The rest of the spending will be focused on operational optimization and revenue generation initiatives. VAA plans to finance capital outlays mainly with cash or cash flows from operations. Under the base-case traffic forecast and assuming VAA will maintain its cash balance above $150 million, DBRS Morningstar estimates about $250 million of total spending will be funded with incremental external debts by 2027.

DBRS Morningstar expects VAA to have adequate liquidity to cover all operational and financial expenditures under the DBRS Morningstar base-case traffic forecast scenario. The Authority reported a total cash balance of $374.3 million as of June 30, 2023, and forecast it will remain around this level by the end of 2023. DBRS Morningstar expects that the Authority's cash balance will gradually decline as it is being used to partially fund capital outlays. VAA also has a $300 million credit facility, of which approximately $277 million remains available to date, with the balance allocated for the letters of credit to support post-retirement benefits. Further, DBRS Morningstar draws comfort from the Authority’s conservative management and relatively low airport improvement fees, which potentially can be increased to help fund future capital needs.

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

ENVIRONMENTAL, SOCIAL, 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 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 (July 4, 2023) at https://www.dbrsmorningstar.com/research/416784.

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.

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 credit ratings are under regular surveillance.

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

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