Plummeting passenger volume at Vancouver International Airport (YVR) has prompted the global credit ratings agency DBRS Morningstar to change what it considers the "trend" on operator Vancouver Airport Authority’s (VAA) issuer rating, and its senior debentures rating to "negative" from "stable."
This move by DBRS Morningstar does not change the credit rating for VAA's issuer rating or its senior debentures rating, as it confirmed that those ratings both remain at AA (low) – not a bad rating, as it is at the lower end of the AA rating, which indicates superior credit quality.
DBRS Morningstar's "trend" rating is always either positive, stable or negative, and its downgrade to VAA represents a warning that the future outlook at the airport is looking worse than it previously identified.
No one from the VAA was immediately available for a comment on DBRS Morningstar's move.
BIV in March asked former VAA CEO Craig Richmond about his organization's capacity to withstand the shock to the economy and hit to the amount of people who are willing to travel that the pandemic could have. This was particularly relevant at the time because of what was then a recent briefing by DBRS Morningstar that suggested that the COVID-19 crisis could prompt Canadian airport authorities to test their credit ratings and financial liquidity.
"We have a very strong financial situation with a double A credit rating, with money in the bank, with the ability to increase our lines of credit, so no, we're no more worried than any other business person would be worried given what we're facing in the world economy today," Richmond said in March.
"It's going to be a bad month but we'll come out the other side of this. One of the things we have to do as an airport is be ready to grab the upside again because the tourism economy is so important to the province of British Columbia."
DBRS Morningstar on September 1 explained that it changed its "trend" rating mainly because of the significant decline in projected passenger volume at YVR this year, and the potentially long recovery period that the airport authority faces as a result of the ongoing COVID-19 pandemic, as well as because of the VAA's plan to increase its debt leverage to add liquidity and make it easier to finance what the VAA considers necessary capital projects.
"DBRS Morningstar expects VAA’s financial metrics to become much weaker than 2019 levels," the ratings agency said in a statement.
"Additional waves of infection may require further government interventions to contain the pandemic, which could potentially interrupt the path to recovery; this level of uncertainty with respect to recovery will likely continue to exert pressure on the current ratings."
Passenger traffic at YVR rose 1.7% in 2019 to 26.4 million people thanks to more domestic and international travel. All major revenue sources, except the airport improvement fee (AIF), increased in 2019. The VAA raised the AIF for the first time since 2012 at the start of 2020.
The 1.1% revenue rise in 2019 came in tandem with added expenses, with the result being that earnings before interest, taxes, depreciation and amortization (EBITDA) fell about 6%, DBRS Morningstar said.
"After VAA issued the Series H Debentures in October 2019, total debt rose to approximately $900 million at the end of 2019, or close to $70 per enplaned passenger, compared with $46 per enplaned passenger in 2018," it said in its statement.
The agency added that the airport authority's interest coverage ratio (ICR), which determines how many times the VAA can pay interest expenses on its outstanding debt, reduced slightly to 8.3 times from 9.1 times because of higher interest and weaker EBITDA.
"Performance during the first two months of 2020 was almost on par with the same period in 2019; however, as the World Health Organization declared the coronavirus a pandemic on March 11, 2020, and governments around the world implemented a series of containment measures, VAA experienced a dramatic traffic volume drop in March, with monthly volume down 48% compared with last year," it said.
"The [VAA] saw an even more severe impact in April 2020 as Canadian federal, provincial, and municipal governments began to impose more stringent travel bans and lockdown measures in the second half of March. Total traffic volume in April 2020 decreased by 97% compared with April 2019 and recovered slowly in May and June 2020, but was still 96% and 92% below the corresponding monthly levels in 2019, respectively."
YVR passenger traffic was 58% lower in the first half of 2020, compared to what it was in the first half of 2019 – a decline that was in line with the drop in demand for air travel worldwide, DBRS Morningstar added.
It wrote that the VAA is managing operations "conservatively," based on the premise that total passenger volume in 2020 would be only 29% of the 2019 level, with no meaningful recovery in 2021, and a recovery to less than 50% of the 2019 level by 2024. It calls this premise the VAA Planning Case.
The VAA has adopted a series of cost-cutting initiatives, such as laying off 25% of its staff and cutting its 2020 capital expenditure budget by almost 50%, DBRS Morningstar said.
The VAA's plan is to complete major projects that are underway and strategically significant, such as its YVR CORE program, which is comprised of four projects that will improve and upgrade the heating, cooling, and electrical infrastructure at the airport. The Pier D Terminal Expansion project is also slated to continue, although thousands of construction jobs have been chopped as it halted work on other projects.
DBRS Morningstar said that it expects total capital-expense cost at YVR in the years between 2020 and 2023 to drop to $1.1 billion from the pre-pandemic forecast of $1.9 billion. The agency thinks the VAA will rack up to approximately $1 billion in additional debt between 2020 and 2024 to partially fund these projects, depending on the pace of recovery and any further reviews of the capital projects.
It said that the VAA has no imminent refinancing needs, with its next repayment due on December 7, 2026, for the Series B Debentures. The VAA increased its bank facility at the end of May, to $450 million from $300 million. As of June 30, the VAA had approximately $67 million in unrestricted cash and approximately $428 million was available under the bank line of credit, DBRS Morningstar said.
The agency added that the VAA's credit facility will revert to $300 million at whichever is earlier: its August 31, 2023, maturity date or the date that the VAA issues at least $200 million in debentures. If VAA does not issue any debentures this year, there would be $266 million available in the facility at December 2020 under the VAA Planning Case, suggesting adequate liquidity, DBRS Morningstar said.
The VAA has requested consent to waive its 1.25 times default ICR, and the 1.75x additional indebtedness ICR requirements, through 2023, DBRS Morningstar said. It added that the deadline to receive the written waiver is September 9, and that there could be a meeting of debenture holders on September 16, if required.
DBRS Morningstar said that it understands that if these covenants are not waived, VAA may convert up to $29 million in retained earnings from Vancouver Airport Enterprises Ltd. into dividend income to avoid a potential breach of the 1.25 times default ICR covenant in both 2020 and 2021.
DBRS Morningstar noted that on July 30, the International Air Transport Association (IATA) forecast that the annual global revenue passenger kilometres in 2020 would decline by more than 60% compared with 2019, that this metric not fully recover to pre-pandemic levels before 2024, and that the potential downside could be more severe than the upside.
"VAA experienced a slower volume recovery from the 2008-09 financial crisis than some of its peers, and DBRS Morningstar anticipates that the strained China-Canada relations could introduce additional uncertainties to VAA’s path to recovery," DBRS Morningstar said.
It added that it currently assumes that YVR will see 7.7 million passengers in 2020, followed by 12.2 million passengers in 2021 and slow growth up to 23.3 million passengers in 2024.
"Under the DBRS Morningstar Base Case, DBRS Morningstar expects VAA’s major financial metrics to be much weaker in 2020, but to revert to the levels commensurate with the current ratings in 2021," it said.
DBRS Morningstar said that it may change the "trend" rating to "stable" after passenger volume has meaningfully recovered, and key financial metrics are sufficiently restored.
Conversely, DBRS Morningstar said it may take "negative rating action," which would be a downgrade of VAA's credit rating, "if it becomes apparent that total passenger volume in 2021 will not be materially better than the VAA Planning Case, unless there is clear evidence suggesting that volume will catch up more quickly in later years."