TEXT-S&P affirms Greater Toronto Airports Auth ratings

(The following statement was released by the rating agency) Overview

-- We believe the Greater Toronto Airports Authority’s (GTAA) business profile remains very strong despite recent challenges from the slowing global economy and ongoing volatility in oil prices.

-- We are affirming our ‘A’ long-term issuer credit and senior secured debt ratings on the GTAA.

-- The stable outlook reflects Standard & Poor’s expectations that passenger traffic will continue to grow in the near term, albeit at a slower pace. Rating Action On Aug. 24, 2012, Standard & Poor’s Ratings Services affirmed its ‘A’ long-term issuer credit and senior secured debt ratings on the Greater Toronto Airports Authority (GTAA or the authority). The outlook is stable. Rationale The ratings on GTAA reflect Standard & Poor’s assessment of the following factors:

-- GTAA’s business profile, which remains very strong despite many challenges in recent years. The authority has proven resilient against a number of stresses that affected passenger traffic in the past 10 years including the terrorist attacks of Sept. 11, 2001; the Iraq war; the 2002-2003 SARS outbreak in Toronto; increased security into the U.S.; a strong Canadian dollar; volatility in oil prices; and, most recently, the global recession;

-- The authority’s monopoly position in delivering an essential transportation service together with its unencumbered rate-setting autonomy. The ground lease agreement with Transport Canada gives GTAA the right to operate and maintain Toronto Pearson International Airport for 60 years, with an option to renew for an additional 20;

-- Lack of competition during the term of the ground lease. The agreement provides protection that Transport Canada will not construct and operate a major international airport within 75 kilometers of Pearson during the agreement’s term;

-- The strong underlying service area of the Greater Toronto Area (GTA), which has a population of more than 5.8 million and makes up about 17% of Canada’s population;

-- GTAA’s improving financial profile in the past three years, despite challenges from an uneven economic recovery. GTAA’s revenues rebounded in 2011, posting a 2.3% increase, thanks in large part to an increase in passenger traffic. Its financial performance as reflected in its debt service coverage ratio (DSCR; Standard & Poor’s adjusted) and debt per enplaned passenger has improved thanks to measures management has taken to deliver cost savings and improve efficiencies. For fiscal 2012, we estimate that GTAA’s cash-based, interest-only DSCR and its operating surplus balance (Standard & Poor’s adjusted; calculated after debt service and before capital spending and amortization) as a share of revenue ratio will continue to improve. This improving trend likely will continue in the medium term, although there remain some near-term risks with passenger traffic and revenues because of the uncertain global economic recovery. Although these ratios are below those of similarly rated domestic peers, GTAA is the only pure residual rate-setting airport among the Tier I Canadian airport authorities. As a result of this approach, the authority establishes aeronautical rates to recover its costs to achieve a cash-based DSCR of about 1.20x-1.25x and to maintain compliance with its 1.25x DSCR-based rate covenant; and

-- Relatively modest capital spending requirements in the next five years. With the completion of Pier F in 2007, GTAA’s Airport Development Program (ADP) shifted to more modest expenditures outlined in the authority’s post-ADP capital program; GTAA expects new gate capacity expansion will not be needed until 2020 at the earliest. The following factors constrain our ratings:

-- A still significantly higher debt and cost burden compared with that of other airport facilities that we rate globally, although the authority’s common use platform and residual rate-setting framework make direct comparisons more difficult with other rated peer airports. Although high, GTAA’s cost per enplaned passenger declined to about C$34 in 2011 (Standard & Poor’s calculated) from about C$39 in 2009, due to five consecutive declines in landing and terminal fees since 2007. The announced decrease in terminal charges and landing fees for 2012 is likely to result in a further decrease in GTAA’s cost per enplaned passenger to about C$32 in 2012. Our projections indicate that this ratio will remain near this level through 2013. This is among the highest in Standard & Poor’s rated airport portfolio;

-- Exposure to passenger volumes, which are susceptible to the cyclical nature of Canada’s and the global economy and other event risks. Canadian airport authorities (CAAs) have long-dated capital planning horizons that rely heavily on passenger traffic growth, which, if it doesn’t materialize, could leave CAAs with reduced financial flexibility.

-- The aviation industry’s systemic risks inherent in exposure to changing airline route preferences, airline flight rationalization, and the generally weaker counterparty credit quality of most carriers -- although this is common to all CAAs. However, the expected take-up of displaced capacity by other domestic carriers mitigates the potential loss, due to the strong demand characteristic of airport authorities with good origin and destination markets;

-- Potential medium-term refinancing risk, given GTAA’s large debt outstanding. The authority’s liquidity, including available reserves, its unencumbered credit facility, its demonstrated access to capital markets, and the presence of a voluntary notional principal fund mitigate this risk somewhat, however. Moreover, GTAA’s management conservative debt management practices further mitigate this risk. Outlook The stable outlook reflects Standard & Poor’s expectations that, despite uneven economic growth expected in the next two years, passenger traffic will continue to grow at a modest pace of less than 3% per year. We also expect that the authority’s rate-setting capacity will not change; debt reduction will continue, through contributions to its notional principal fund and from free cash flow; GTAA’s financial metrics will not deviate materially from projections; and any future capital expansion will depend on passenger growth. Not meeting some of these expectations could place downward pressure on the ratings. Conversely, a more sustained recovery in passenger traffic and a more aggressive debt reduction plan could lead to a positive outlook or an upgrade. Related Criteria And Research

-- General Criteria: Rating Government-Related Entities: Methodology And Assumptions, Dec. 9, 2010

-- USPF Criteria: Airport Revenue Bonds, June 13, 2007 Ratings List Ratings Affirmed Greater Toronto Airports Authority Issuer credit rating A/Stable/-- Senior secured A (Caryn Trokie, New York Ratings Unit)