DBRS Confirms Edmonton Regional Airports Authority at A (high), Stable Trend

DBRS has today confirmed the rating on the Revenue Bonds issued by the Edmonton Regional Airports Authority (the Authority) at A (high). The trend is Stable. The rating incorporates the Authority’s significant progress in the implementation of Expansion 2012 (the Expansion) in a timely and cost-effective manner, but is tempered by the fairly heavy borrowing necessitated by the capital program and the expectation that credit metrics will deteriorate during the near term, a situation exacerbated by lower-than-expected traffic growth.

The Authority has done a good job of managing the costs of the Expansion. Originally earmarked at $920 million in 2008, the price has been revised downwards as a result of savings on labour and material procurement, innovative measures (such as Terminal Express – a temporary addition to facilitate operations during construction), as well as de-scoping of the project. Current projections put the total costs at approximately $656 million, a savings of 29% compared with the original budget. Work is proceeding on schedule, and will see some retail offerings opening in December 2011, with the transborder and domestic/international portions of the Expansion opening in February 2012 and September 2012, respectively. The combined office tower and the hotel are expected to open in late 2012. At the time of this report, approximately 75% of the budget was committed and 100% of procurement had been completed.

Despite flat traffic growth in 2010, EBITDA increased by 5.2% as higher airport improvement fee (AIF) rates and higher concession and parking revenues partially offset growth in expenses, which was supportive of maintaining the debt service coverage ratio (DSCR) at 1.7 times. During the first six months of 2011, modest, albeit accelerating, traffic growth of 1.7% drove EBITDA up 2.3% over the first half of 2010. However, larger debt servicing needs have substantially eroded the DSCR, which stood at 1.3 times at the end of the second quarter, but is in line with expectations. Traffic continues to improve and is up 2.7% for the first ten months of the year.
Despite recent growth, passenger traffic has been slow to recover from the 2009 downturn and has lagged both the Authority’s projections and most of the other Canadian airport authorities that DBRS rates. As noted in the rating report of November 2010, debt per enplaned passenger had been expected to peak at $296 in 2012 per the Authority’s base case forecast. While fairly significant cost savings during the Expansion have translated into lower borrowing needs, the slower-than-expected pace of passenger growth has placed more strain on per-enplaned passenger metrics, and debt per enplaned passenger is now expected to reach $308 in 2012 under the revised base case. The base case forecast is predicated upon traffic growth of 3% in 2011 and 4.3% in 2012, which DBRS views as potentially optimistic, particularly given the relatively fragile state of the economic recovery.

The levels of $300 of debt per enplaned passenger and a DSCR of 1.25 times are considered by DBRS as key metrics for the A (high) rating. The Authority has taken these levels into account and has raised its AIF to $25 effective January 1, 2012, as well as chosen some delayed-amortization loans (interest only for a period of six years), and intends to implement additional aeronautical fees increases in 2013 and 2014. While DBRS draws comfort from management’s resolve to keep within DSCR and debt per enplaned passenger targets, at the current rating level DBRS would be unwilling to tolerate a prolonged period within which the debt per enplaned passenger remained above $300 should passenger traffic fail to materialize as planned.

Note:
All figures are in Canadian dollars unless otherwise noted.

The applicable methodology is Rating Canadian Airport Authorities, which can be found on our website under Methodologies.