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Rating Action:

Moody's downgrades St. John's International Airport Authority to A2; outlook negative

20 Jul 2020

Approximately C$115 million of rated debt affected (face value)

Toronto, July 20, 2020 -- Moody's Investors Service, ("Moody's") has today downgraded St. John's International Airport Authority's (SJIAA or the Authority) senior secured rating to A2 from A1 as well as its BCA to a2 from a1. The ratings outlook is negative. This rating action concludes the review process initiated on 30 March 2020.

Downgrades:

..Issuer: St. John's International Airport Authority

....Senior Secured Revenue Bonds, Downgraded to A2 from A1

Outlook Actions:

..Issuer: St. John's International Airport Authority

....Outlook, Changed To Negative From Rating Under Review

RATINGS RATIONALE

The rating action reflects Moody's expectation of a sustained weakening in SJIAA's credit profile owing to the combined economic shock of the coronavirus outbreak and the low oil price environment. Moody's expects that SJIAA's credit metrics will largely recover from the effects of the outbreak over the course of the next three to four years as air traffic returns. However, a backdrop of stagnant to somewhat negative passenger growth prior to the outbreak and a local service area economy with a relatively higher exposure to the oil and gas sector than many of its peers constrains the rating. The downgrade of SJIAA's ratings balances its adequate liquidity against the breadth and severity of the coronavirus shock and the uncertain trend in passenger demand that will extend well beyond 2021.

The rapid spread of the coronavirus outbreak, deteriorating global economic outlook, low oil prices and asset price volatility are creating a severe and extensive credit shock across many sectors, regions and markets. The combined credit effects of these developments are unprecedented. The airport sector has been one of the sectors most significantly affected by the shock, given its exposure to travel restrictions and sensitivity to consumer demand and sentiment. Moody's regards the coronavirus outbreak as a social risk under its ESG framework, given the substantial implications for public health and safety.

Against this backdrop, Moody's has revised its traffic assumptions for Canadian airports recognizing that the impact of the reduction in global air travel on Canadian airports will not be even and will vary depending on the airport location, its airline mix and type of traffic served. Given the current travel restrictions, Moody's expects domestic flights will recover earlier and stronger than international travel.

Based on updated traffic scenarios, Moody's expects that the decline in SJIAA's passenger traffic will amount to approximately 75% to 80% in the year ending December 2020 compared to the prior year, with passenger volumes unlikely to reach 2019 levels before 2024. There remains, however, high risks of more challenging downside scenarios, including a deeper reduction in passenger volumes and a slower than expected recovery.

Diminished passenger traffic will significantly reduce SJIAA's cash flows in 2020. The extent of the decline will be only partly offset by reductions in operating costs and capital spending, coupled with subsidies from the Government of Canada (Aaa stable) in the form of the Canadian Emergency Wage Subsidy program and relief of rent to Transport Canada from March through December of 2020. However, Moody's expects that SJIAA's cash flow preservation measures and liquidity profile, consisting of unused credit facilities and reserves, will allow it to withstand such material losses contemplated in 2020 before being in a position to commence repayment of the liquidity it has likely drawn upon setting the state for improving credit metrics by 2022 to 2023.

More generally, SJIAA's A2 senior secured rating and a2 BCA continue to reflect (1) SJIAA's role as the airport serving the needs of St. John's, the capital of the province of Newfoundland and Labrador (2) the essential role the Canadian airports such as SJIAA play in Canada given the country's very large size and low population density; the role is all the more crucial for SJIAA since it is located on an island that is otherwise served by ferry service involving lengthy crossing and driving times (3) the general lack of competition between Canadian airports and from other types of transportation (4) the airport authorities' unfettered right to set fees, charges and rates with only minimal notice periods for changes and (5) its high origin and destination traffic at about 93%.

SJIAA is considered a Government Related Issuer (GRI) of the federal Government of Canada (Aaa stable) with a BCA of a2 and an assumption of low dependence and low likelihood of extraordinary support from the Canadian government.

LIQUIDITY

SJIAA has an above average liquidity profile that Moody's expects to withstand the material loss of passenger traffic contemplated in Moody's Base Case over the next three to four years before traffic recovers to 2019 levels in 2024. SJIAA has taken prudent measures to bolster its liquidity such as cost management and capital expenditure reductions. Moody's understands that, as of March 31, 2020, SJIAA's total liquidity amounted CAD42.5 million including over CAD28.5 million in undrawn credit facility, CAD10 million that could be drawn from a capital expenditure facility, a cash-funded Debt Service Reserve Fund and CAD1.2 million in cash. The required operating and maintenance reserve is a carve out of its credit facility.

RATING OUTLOOK

The negative outlook reflects our expectation of continued uncertainty for the pace and strength of passenger recovery across the overall sector in addition to a softer economic outlook for the local economy owing to its relatively high exposure to the oil and gas sector.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Factors that would lead to an upgrade of the ratings:

Given the negative outlook, upward rating pressure on SJIAA's ratings is unlikely in the near future.

However, the outlook could be stabilized if (1) there is a material and sustained improvement in the pace of traffic recovery at the airport; (2) it appears likely that SJIAA would be able to maintain a financial profile commensurate with the current rating; or (3) there is a material and sustained improvement in SJIAA's liquidity.

Downward pressure on SJAA's ratings could develop if:

- It appears likely that the coronavirus outbreak will have a more sustained detrimental impact on traffic levels, either because of travel restrictions or potential airline failures and that it appears unlikely the airport will be able to recover a material portion of its 2019 passenger traffic by 2024.

- Any legislative or other development(s) which would limit SJIAA's ability or willingness to set rates and charges as necessary to fully cover its costs will cause a downgrade.

- A materially impaired liquidity position.

- Once passenger traffic has normalized, a DSCR of less than 2.5x on a sustained basis.

- Once passenger traffic has normalized, increased debt + adjusted net pension liability (ANPL) per O&D enplaned passenger above CAD200 on a sustained basis.

SJIAA is a non-share capital corporation responsible for the operation of the St. John's International Airport. It retains and reinvests all earnings in the management, operation and development of the Airport. SJIAA has operated the St. John's International Airport under the terms of its Ground Lease with Transport Canada since December 1998. The Ground Lease expires in 2078.

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 DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

At least one ESG consideration was material to the credit rating action(s) announced and described above.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Rebecca Adair
Vice President - Senior Analyst
Project Finance Group
Moody's Canada Inc.
70 York Street
Suite 1400
Toronto, ON M5J 1S9
Canada
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

A.J. Sabatelle
Associate Managing Director
Project Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Canada Inc.
70 York Street
Suite 1400
Toronto, ON M5J 1S9
Canada
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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