TEXT-S&P affirms Ottawa Macdonald Cartier Int'l Airport 'A+' rating
Overview -- We are affirming our 'A+' long-term issuer credit and senior secured debt ratings on Ottawa Macdonald Cartier International Airport Authority. -- The ratings reflect our assessment of the authority's strong competitive position, light-handed regulatory framework, sound financial metrics, and adequate liquidity. -- The stable outlook reflects our expectation that Ottawa's passenger volumes will flatten in 2013, before recovering moderately in 2014. Rating Action On Jan. 22, 2013, Standard & Poor's Ratings Services affirmed its 'A+' long-term issuer credit and senior secured debt ratings on Ottawa Macdonald Cartier International Airport Authority (Ottawa or the authority), the operator of Ottawa Macdonald Cartier International Airport. The outlook is stable. Rationale The ratings on Ottawa reflect our view of the authority's strong competitive position, light-handed regulatory framework, sound financial metrics, and adequate liquidity. We believe significant airline customer concentration and unmitigated passenger volume exposure constrain the ratings. In our view, Ottawa has a strong competitive position that contributes to stable and predictable operating cash flows. It has a monopoly on airport services in Canada's capital, the City of Ottawa, and surrounding region. It also has a high origination and destination passenger mix, at about 90%. As a result, its passenger volumes are tied closely to the performance of the local economy, which has shown exceptional long-term stability due to its large public sector. While government fiscal consolidation efforts are likely to depress local economic activity, we expect regional economic fundamentals to remain sound in the next two years, supporting the authority's passenger demand and revenues. Like other Canadian airport authorities (CAAs), Ottawa has unimpeded rate-setting autonomy that provides tremendous financial flexibility. The authority can fully adjust rates without government approval, although it must give 60 days' notice to airport stakeholders. It can also seize aircraft for nonpayment of airport bills. This, together with its active and historically successful receivables management practices, reinforces its rate-setting power. Ottawa also has a low aeronautical rate structure, which offers additional flexibility and stimulates travel demand. As a guiding principle, management uses incremental revenue from passenger growth to cover inflationary operating costs, filling any shortfall with aeronautical rate increases. On the capital side, it leverages or directly uses revenue from an airport improvement fee (AIF) on passengers to fund expansion work. It has managed both envelopes well, maintaining the lowest average aeronautical fees among tier 1 CAAs in 2012 and a relatively moderate AIF of C$20 per ticket. We expect the authority to retain a strong competitive rate advantage in the next two years, notwithstanding its planned 3% aeronautical fee increase effective Feb. 1, 2013. Ottawa also has strong financial metrics relative to those of similarly-rated CAAs. By our estimates, its debt burden was about C$150 per enplanement in 2012, while its indenture-based debt service coverage ratio (DSCR) was 2.2x. We expect these metrics to weaken moderately in the next two years, as the authority increases its bank facility draws to partly fund several capital projects. In particular, we expect Ottawa's debt per enplanement to reach approximately C$160 in 2014, well below the peak of C$170 it had in 2007. However, we believe the authority has large airport client concentration that exposes its revenue base to airline strategy changes or financial difficulties. Its main client is Air Canada and its affiliates, which account for more than half its passenger base. The trend toward increasing market share of WestJet Airlines Ltd. and Porter Airlines Ltd. at the airport, particularly since 2008, has lessened Air Canada's concentration. In addition, we believe consistent strong passenger growth at the airport has introduced challenges, particularly in the international and transborder areas, that could require Ottawa to undertake the next round of major airport expansion ahead of the 2017 timeframe it predicted in its 2008 master airport plan. We believe these growing constraints temper to some extent the authority's flexibility to materially postpone or defer works to manage its financial metrics in the medium term. Outlook The stable outlook reflects our expectation that Ottawa's passenger volumes will flatten in 2013, before recovering moderately in 2014. To the extent its traffic underperforms, or its outlook beyond two years deteriorates, we expect the authority to raise fees or cut discretionary spending to avoid material erosion in financial metrics relative to historical levels. We could revise the outlook to positive or raise the ratings if, all else equal, we came to expect Ottawa would strengthen its financial metrics in the next two years, with a debt per enplanement near C$100 and a DSCR consistently exceeding 2.0x. Alternatively, we could lower the ratings if the federal government introduced potentially negative changes to CAAs' regulatory environment, or we foresee a significant weakening in the authority's financial metrics versus historical levels in the next two years. We view both scenarios as unlikely. Related Criteria And Research -- USPF Criteria: Airport Revenue Bonds, June 13, 2007 -- Rating Government-Related Entities: Methodology And Assumptions, Dec. 9, 2010 Ratings List Ottawa Macdonald Cartier International Airport Authority Issuer credit rating A+/Stable/-- Senior secured debt A+ Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column.