Aeroports de Montreal -- Moody's affirms Aéroports de Montréal's A1 senior secured ratings; outlook changed to stable

Rating Action: Moody's affirms Aéroports de Montréal's A1 senior secured ratings; outlook changed to stableGlobal Credit Research - 29 Mar 2022Approximately C$2.9 billion of rated debt affected (face value)Toronto, March 29, 2022 -- Moody's Investors Service, ("Moody's") today affirmed Aéroports de Montréal's (ADM or the Authority) a1 Baseline Credit Assessment (BCA) as well as the A1 senior secured rating for the existing debt owing to the steady recovery of passenger traffic through the second half of 2021, which is expected to persist through 2022. ADM's outlook was changed to stable from negative.ADM is considered a Government Related Issuer (GRI) of the Government of Canada (Aaa stable) with a BCA of a1 and an assumption of low dependence and low likelihood of extraordinary support from the Canadian government.RATINGS RATIONALEToday's rating action reflects the strong recovery of passenger traffic at ADM and Moody's expectation that ADM's passenger traffic will gradually recover through 2022 and return to close to 2019 levels by the end of 2023. While the decline in passenger traffic was severe during the peak of the pandemic in 2020 and early 2021, traffic levels have recovered significantly during the second half of 2021, with domestic and international travelers returning to 60% and 57% of 2019 levels in December of 2021. This strong recovery of passenger was a direct result of the loosening of travel restrictions in the third quarter of 2021, when the federal government removed the heavy restrictions that were in place for international travel. While the higher infection rates of the omicron variant spurred a new round of travel restrictions in early 2022, the negative impact on passengers proved to be less severe than the decline suffered in the initial stages of the pandemic. In March, with the effect of the omicron wave of the coronavirus having been largely alleviated, the federal government announced that it will further ease air travel restrictions for fully vaccinated travelers. We expect that this, in conjunction with strong pent-up demand for travel, will result in the bounce-back of recovery of passenger traffic through the summer of 2022 and continue into 2023.During the initial stage of the pandemic, ADM demonstrated its ability to mitigate the negative impact of lower-than-expected traffic volumes through a number of substantial cost-cutting measures including the scaling back of its capital expenditure program, the implementation of a material reduction in its workforce as well as a reduction in operating costs due to the temporary closure of certain areas of the terminal. ADM also increased in its rates and fees which became effective at the beginning of 2021. While there was not any air transportation specific support package from the federal government, the federal government has taken a number of measures designed to alleviate the Canadian airports' liquidity needs through waivers or deferrals of the ground lease payments, including the waiver of the majority of the 2020 ground lease payment and deferral of the 2021 payment for ADM. Additionally, ADM was able to access general programs such as the wage subsidy program that was extended to September 2021. Also, ADM issued C$900 million of additional debt in 2020 and 2021 to finance its operating needs during the height of the pandemic and to bolster liquidity, which will have a negative impact on the authority's credit metrics over the long term. However, we note that ADM entered the pandemic with very solid debt service coverage ratios (almost 2.75x Moody's DSCR) and declining debt per O&D enplaned passenger, which allows ADM some buffer to withstand some metrics deterioration without appreciably deteriorating its credit profile.Overall, once passenger traffic recovers, ADM's A1 senior secured rating and a1 BCA will continue to reflect (1) ADM's role as the third largest airport in Canada serving the needs of the City of Montreal, the second largest metropolitan area in the country (2) the essential role the Canadian airports such as ADM 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 authority's unfettered right to set fees, charges and rates with only minimal notice periods for changes and (5) ADM's relatively high origin and destination traffic at close to 80%. As well, ADM has no material debt maturities until 2027, when their C$150 million revolving credit facility is due.LIQUIDITYTo bolster its liquidity during the peak of the pandemic, ADM increased the amount of its credit facility to C$250 million (from C$150 million) in May 2021 for a period of 2 years, with the facility remaining largely unused (some of which is earmarked for meeting the trust indenture Operating and Maintenance Reserve and used namely to issue letters of credit to meet the debt service reserve requirements). ADM has estimated cash of approximately C$400 million in addition to an unused cash debt service reserve totaling in excess of C$50 million.RATING OUTLOOKThe stable outlook reflects Moody's expectations that ADM's passenger traffic will recover over the next 18 to 24 months and return to 2019 levels by 2024 and its liquidity will be sufficient to operate through the traffic recovery period under our base case scenario.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSUpward pressure on ADM's ratings could develop if, once air travel returns to normal traffic performance, there is:- A significant improvement in ADM's credit metrics and the debt to enplanements metric falls to below $200 per enplanement;- Reassessment of the Government Related Issuers (GRI) support level; or- Increased diversity of air carriers with the largest one representing less than 35% of trafficDownward pressure on ADM's ratings could develop if:- the recovery of passenger traffic is slower than expected or reverses, possibly as a result of additional rounds of travel restrictions arising from new variants, which causes a sustained detrimental impact on traffic levels- Any legislative or other development(s) which would limit ADM'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- Inability to return to 1.75x DSCR and CAD450 debt per O&D enplaned passenger by 2023.PROFILEAéroports de Montréal is a non-share capital corporation responsible for the management, operation, and development of YUL Montréal-Trudeau International Airport (Montréal-Trudeau) and YMX International Aerocity of Mirabel (Mirabel) under the terms of the Ground Lease concluded with Transport Canada in 1992 and expiring in 2072. ADM served 5.2 million passengers in 2021 at Montréal-Trudeau, while Mirabel's aeronautical operations are limited to cargo traffic.The methodologies used in these ratings were Publicly Managed Airports and Related Issuers published in March 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1140469, and Government-Related Issuers Methodology published in February 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1186207. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.REGULATORY DISCLOSURESFor further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. 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