03 Nov 2020
Approximately CAD6.8 billion of rated debt affected
Toronto, November 03, 2020 — Moody’s Investors Service, (Moody’s) today affirmed Greater Toronto Airports Authority’s (GTAA, the Authority) Aa3 senior secured rating, aa3 Baseline Credit Assessment (BCA) and assigned a senior secured Aa3 rating to the issuance of the Series 2020-1 notes maturing May 3, 2028 in an amount of CAD500 Million. The outlook remains stable.
The Series 2020-1 notes are issued under the GTAA’s capital markets platform and a trust indenture dated December 2, 1997 as supplemented by a supplemental indenture dated November 3, 2020. As a result, the Series 2020-1 notes rank pari passu with the existing GTAA’s senior secured notes. The net bond proceeds will be used to repay an equivalent amount of certain short-term borrowings and fund the required debt service reserve.
RATINGS RATIONALE
Today’s rating action reflects Moody’s expectation that while GTAA’s passenger traffic losses have been material since March 2020, and will likely continue to be substantial at least through 2021 when compared to 2019, its revenues have been comparatively more resilient owing to revenue contracts that contemplate fixed payments or a combination of fixed payment and volumes. As well, GTAA has taken a number of material cost cutting measures including the scaling back of its capital expenditure program and has already announced an increase in its rates and fees effective at the beginning of 2021. Liquidity through the next two years to address the cash burn will be critical and, with the new bond issue, GTAA is replenishing a solid liquidity position that should be sufficient to see it through its latest conservative assumptions for traffic recovery in the next few years. Moody’s notes that GTAA had repaid material amounts of debt in the last several years while also growing substantially. By reference, GTAA grew from some 34.9 million passengers in 2012 to some 50.5 million passengers in 2019 while also repaying some CAD700 million in debt, thus created some ability to incur additional debt through the pandemic.
Given the extensive travel restrictions that are in place in Canada, ongoing health related reluctance to travel and economic weakness, Moody’s revised its traffic assumptions for Canadian airports recognizing that the impact of the reduction in air travel on Canadian airports will not be even and will vary depending on the airport location, its airline mix and type of traffic served. Moody’s expects domestic flights will recover earlier and stronger than international travel and US bound travel. The latter is limited due to border closings that are reconducted every month and quarantine requirements upon return to Canada.
Based on updated traffic scenarios, Moody’s expects that the decline in GTAA’s passenger traffic will amount to approximately 75% in the year ending December 2020 compared to the prior year, with passenger volumes unlikely to return to 2019 levels before 2024. There remains, however, high risks of more challenging downside scenarios, including a deeper reduction in passenger volumes and a slower than expected recovery if a vaccine is delayed and travel restriction measures cannot be lifted.
While Moody’s expects a sustained weakening in GTAA’s credit profile in the next two years owing to the combined effect of the economic shock of the coronavirus outbreak and the ongoing travel restrictions, Moody’s also expects that GTAA’s credit metrics will largely recover from the effects of the outbreak over the course of the next three to four years as air traffic returns.
More generally, once passenger traffic recovers, GTAA’s Aa3 senior secured rating and aa3 BCA will continue to reflect (1) GTAA’s role as the largest airport in Canada serving the needs of Toronto, the largest metropolitan area in the country (2) the essential role the Canadian airports such as GTAA play in Canada given the country’s very large size and low population density (3) the general lack of competition between Canadian airports and from other types of transportation (4) the airport authorities’ unfettered right to set fees, charges and rates with only minimal notice periods for changes and (5) GTAA’s relatively high origin and destination traffic at about 70%. As well, GTAA has no material debt maturities until 2022, at which point there should be enhanced visibility on actual traffic recovery trajectories.
GTAA is considered a Government Related Issuer (GRI) of the Government of Canada (Aaa stable) with a BCA of aa3 and an assumption of low dependence and low likelihood of extraordinary support from the Canadian government.
The rapid spread of the coronavirus outbreak, deteriorating global economic outlook, low oil prices and asset price volatility are creating a severe and extensive credit shock across many sectors, regions and markets. The combined credit effects of these developments are unprecedented. The airport sector has been one of the sectors most significantly affected by the shock, given its exposure to travel restrictions and sensitivity to consumer demand and sentiment. Moody’s regards the coronavirus outbreak as a social risk under its ESG framework, given the substantial implications for public health and safety.
LIQUIDITY
After partial repayment of the short-term borrowings from the CAD500 Million bond issue, GTAA will benefit from a largely unused credit facility and cash in an amount of over CAD1.3 billion as well as unused reserves totaling in excess of CAD500 Million as at the end of the second quarter.
RATING OUTLOOK
The outlook is stable because GTAA has sufficient liquidity to manage through the 2020-2023 period based on current assumptions of traffic recovery which is expected to resume growth once the coronavirus outbreak is contained.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
In light of the material weakening of revenues and metrics until the pandemic is controlled, upward rating pressure on GTAA’s ratings is unlikely in the near future. Upward pressure on GTAA’s ratings could develop if, following the lifting of border and travel restrictions and a return to normal traffic performance there is:
- Reassessment of the Government Related Issuers (GRI) support level
- Increased diversity of air carriers with the largest one representing less than 35% of traffic
- Substantially stronger than expected financial performance on a sustainable basis with material reduction in forecasted net debt per Origin & Destination (O&D) enplaned passenger to below the US$200 (or its equivalent in CAD) and a Moody’s debt service coverage ratio (DSCR) of over 1.75x
Downward pressure on GTAA’s ratings could develop if:
- It appears likely that the coronavirus outbreak has a more sustained detrimental impact on traffic levels, either because of sustained travel restrictions or potential airline failures
- Any legislative or other development(s) which would limit GTAA’s ability or willingness to set rates and charges as necessary to fully cover its costs will cause a downgrade
- Undertaking of a major expansion not justified by expected demand
- Deterioration in credit metrics on a sustained basis so that debt per O&D enplaned passenger exceeds the US$400 (or its equivalent in CAD) threshold and the Moody’s debt service coverage ratio declines to below 1.30x
PROFILE
GTAA is a non-share capital corporation responsible for the operation, management and development of Toronto Pearson International Airport. The responsibilities of the GTAA are set out in the Ground Lease which was executed in December 1996. The Ground Lease has a term of 60 years, with a 20 year renewal option.