Canadian Airport Authorities, NAV Canada, And The Federal Bridge Corp. Ratings Affirmed; Outlooks Revised To Negative

  • COVID-19 travel restrictions have triggered unprecedented traffic declines in a similar fashion across rated Canadian airport authorities (CAAs), NAV CANADA, and the Federal Bridge Corporation (FBCL).
  • For now, we expect these entities to withstand the significant pressure that the traffic decline is exerting on their cash flows, as they possess healthy liquidity, no large upcoming debt maturities, and waived federal ground lease payments through 2020.
  • As a result, we are affirming our ratings on the Edmonton Regional Airports Authority, Greater Toronto Airports Authority, Halifax International Airport Authority, Ottawa Macdonald Cartier International Airport Authority, Vancouver Airport Authority, Winnipeg Airport Authority, NAV CANADA, and FBCL.
  • At the same time, we are revising the outlook on these entities to negative, reflecting a one-in-three chance we could lower their ratings over the next 12-24 months, should a prolonged traffic downturn or slow traffic recovery post-pandemic lead to large and sustained deterioration in financial metrics.
TORONTO (S&P Global Ratings) April 1, 2020--S&P Global Ratings today said it revised its outlooks to negative from stable and affirmed its ratings on the Edmonton Regional Airports Authority, Greater Toronto Airports Authority, Halifax International Airport Authority, Ottawa Macdonald Cartier International Airport Authority, Vancouver Airport Authority, Winnipeg Airport Authority, NAV CANADA, and FBCL.
The outlook revisions reflect the material decline in activity levels globally, both in air and on ground, caused by the rapid spread of COVID-19 and the resultant border control measures taken by various countries, including Canada. Cancellation of nonessential business travel and individuals practicing social distancing are significantly dampening domestic travel as well. The cascading effects of the pandemic and the uncertainty on the duration of the travel curtailment make it difficult to forecast a recovery pattern. An outbreak beyond our current baseline assumptions, leading to a prolonged and material drag on travel, could lead to a large and sustained deterioration in financial metrics for the rated CAAs, NAV CANADA and FBCL, potentially triggering downgrades.
However, these entities derive their revenues from the provision of essential services within strong local economies. They also benefit from supportive regulatory frameworks that in most cases limit competition and provide rate-setting flexibility. In addition, they possess experienced and prudent management teams. As a result, we expect these entities will ultimately recover and, while a prolonged disruption may weaken their financial metrics, they should retain their historical investment-grade credit profiles, in our view.
The most immediate pressure facing these entities is liquidity, as cash flows deteriorate with falling demand. In our view, rated CAAs, NAV CANADA, and FBCL have sufficient liquidity to meet near-term debt obligations with cash on hand and lines of credit. We expect these entities to preserve strong relationships with domestic financial institutions, maintaining their track record of access to external liquidity. In addition, most CAAs have access to a debt service reserve fund equal to six months' debt service and an operations and maintenance reserve equal to six months' expenditures. A lack of bullet maturities in 2020 further relieves pressure on resources. To mitigate the immediate impact to cash flows, all these entities have started to reduce discretionary operating expenditures where possible and lower capital spending. Moreover, the federal government announced recently that it will waive CAAs' ground rent obligations for March to December of 2020, providing an important support to CAA cash flows at a critical time.
S&P Global Ratings' baseline assumption is that the outbreak will peak between June and August of 2020. The spread of the virus has slowed down in much of Asia, but has now accelerated significantly in the rest of the world. In response to the ongoing extraordinary impact of the coronavirus pandemic on economic activity and financial markets, we have marked down global growth to just 0.4% this year, with a rebound to 4.9% in 2021. The decline in activity will be very steep. (For the most current overview, see "The Escalating Coronavirus Shock Is Pushing 2020 Global Growth Toward Zero" published March 30, 2020.)
Our base case for global air passengers in 2020 assumes a decline of 20%-30% from 2019 (for more information see: "The Coronavirus Pandemic Could Reduce Global Air Passengers By Up To 30% In 2020," published March 17, 2020), with full recovery achieved only in 2022-2023. This view takes into account the coronavirus's rapid spread to over 125 countries and the severity of lockdown measures to contain the virus.
We think that the International Air Transport Assn.'s (IATA's) March 5 report estimating the potential loss of air passenger traffic in various regions provides a useful starting point. However, we see significant downside potential to IATA's 10% extensive spread passenger loss projection in Canada, given the recent restrictions on international travel, closure of the Canada-U.S. border, and rapid spread of the virus in the country. We also believe a sudden stop recession is all but certain for Canada, with real GDP contracting an estimated 2% in 2020 (for S&P Global Ratings' most current forecast, see "Oil Price Plunge And COVID-19 Deal A Double Blow To Canada's Economy This Year," published March 27, 2020).
While the Greater Toronto Airport Authority and the Vancouver Airport Authority would have been first to experience traffic declines as major airlines implemented temporary flight cancellations to China at the start of the year, the authorities are two of only four airports in Canada that are receiving international flights at this time. NAV CANADA has a much larger and more geographically distributed service area than most airports, as its core source of demand for its services covers the entire country. It also collects user charges from flyover traffic between the U.S. and Europe, as well as some trans-Pacific flights that transit through international oceanic airspace delegated to Canada, which have also been affected by travel restrictions. In addition, following closure of the Canada-U.S. border to nonessential travel, we expect FBCL to experience a notable decline in traffic as well, particularly in passenger vehicles.
We believe rated CAAs, NAV CANADA, and FBCL are in a good position to manage external shocks and would expect that, if the decline in traffic demand is prolonged, the entities would use their financial flexibility to help cushion cash flows. Some of the levers available to the airport authorities include adjusting aeronautical fees and the airport improvement fee, the proceeds of which are used to fund capital investment and related debt service. Similarly, FBCL has the ability to adjust toll fees to recover some of the losses. These entities could also take additional measures to further postpone nonessential capital work and identify more efficiencies in discretionary operating spending, where possible. Furthermore, healthy debt service coverage levels provide additional financial capacity, in our view.
We expect to review each entity again over the coming months. Our reviews will focus on, among other things, the evolution of this fluid and escalating traffic shock and to what extent, if any, senior governments may deliver additional financial assistance. We will also assess managements' response, including potential budget controls, capital spending and deferrals, receivables management, and efforts to shore up liquidity and continue to comply with any indenture rate covenants.
Environmental, social, and governance (ESG) factors relevant to the rating action:

  • Health and Safety
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