AIR CANADA BANKRUPTCY IMPACT ON CANADIAN AIRPORTS AND NAVCANADA IS UNCERTAIN AT THIS TIME AND WILL BE EVALUATED IN LIGHT OF OTHER INDUSTRY CONCERNS
Moody's Investors Service has downgraded Air
Canada, Inc.'s ("Air Canada") unsecured debt to C from B3. The ratings
reflect the company's announced filing for bankruptcy protection under
the provisions of the Companies' Creditors Arrangement Act and Moody's
assessment of the limited recovery that can be expected by unsecured debt
holders. At this time, Moody's is not taking rating action on the ratings
of NavCanada or the four Canadian airports which it rates, all of which
are impacted by the Air Canada bankruptcy. However, in a separate press
release earlier today Moody's changed the outlook for Aeroports de
Montreal to stable from positive, making it more consistent with the
current economic and air transport industry environment.
Currrent ratings of Canadian Airports and NavCanada are as follows:
Airport Rating Outlook
Greater Toronto Airports Authority A2 stable
Edmonton Regional Airports Authority A1 negative
Aeroports de Montreal A2 stable
Ottawa Macdonald Cartier Airport Authority A1 stable
Nav Canada Aa3 stable
It is too early to assess the credit impact of Air Canada's bankruptcy on
these issuers and Moody's will continue to analyze this developing
situation focusing on a number of areas. These include the impact on
finances and operations of a shrinkage in the passenger market and air
carrier capacity, the effects of the war in Iraq, the outbreak of sudden
acute respiratory syndrome (SARS), and continued economic malaise.
Moody's notes that the airport's and NavCanada current ratings take into
account the financial flexibility they have to adjust rates and charges
during the course of the year as well as the potential to reduce expenses
and delay capital projects, and reserve funds and liquidity lines.
Moody's airport ratings assume that Air Canada will continue to fly and
that the travel demand of the Canadian market will be met. However,
airport management's strategic plans to mitigate these potential
financial, economic, geopolitical adversities, as well as the lost
pre-bankruptcy revenues owed to them by Air Canada, will be key credit
factors over the near term.
The exact amount and circumstances of pre filing exposure for NavCanada
and the four Canadian airports that are rated by Moody's varies though
it appears to be limited to between 30 and 45 days receivables and
airport improvement fee revenues. In addition, Montreal may also be at
risk for some facility financings. The estimated pre-filing exposure as a
percentage of 2003 budgeted gross revenues ranges between 3-11% for the
Canadian airports rated by Moody's.
Moody's estimates that revenues from Air Canada in the form of
aeronautical charges and terminal rentals as a percentage of gross
revenues ranged from 12% to 34% at the Moody's rated Canadian airports.
Moody's expectation is that airport fees will be established as priority
payments in the bankruptcy, given that the airline needs these essential
services to continue to operate. The same expectation holds true for
NavCanada as the virtual monopoly provider of air traffic control
services in Canada.
However, pre-petition fees are potentially at greater risk. NavCanada is
probably the most affected in gross terms with a potential $43 million
pre-petition claim. Management has indicated that they will adjust the
proposed rate increase that is to be approved by their board next week.
Near term financial disruption to operations at the airports is not
expected given their respective reserve accounts, as well as lines of
credit that can be drawn if needed.
Despite the financial and operational strains in the air transport sector,
the Canadian airports' credit position is underpinned by diversified
revenue streams which include airline revenues as well as revenues from
concessions, car parks, car rental facilities, and the airport
improvement fees which are paid by the passengers. As a result, the
ratings will be impacted more by traffic volume trends than by the credit
quality of Air Canada.
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