Rating Action: Moody’s affirms NAV CANADA’s Aa2 ratings and assigns Aa2 to proposed note issue; outlook stable
Global Credit Research – 20 Jan 2021
Approximately CAD3.1 billion of rated debt affected
Toronto, January 20, 2021 — Moody’s Investors Service, (“Moody’s”) today affirmed NAV CANADA’s Aa2 senior secured rating, Aa2 senior unsecured rating, aa2 Baseline Credit Assessment (BCA) and assigned a Aa2 rating to the proposed issuance of the CAD300 million of Series 2021-1 General Obligation Notes due 2026 and the CAD200 million of Series 2021-2 General Obligation Notes due 2024 (together, the Notes). The outlook remains stable.
Today’s rating action reflects Moody’s expectation that while NAV CANADA’s traffic losses have been substantial since March 2020 due to the coronavirus outbreak, and will continue to be so at least through 2021 relative to 2019, they have not been as drastic as the level of lost passenger traffic at the Canadian airports. As of December 2020, NAV CANADA was recovering over 46% of its monthly traffic compared to the same period in 2019 (as measured by weighted charging units) versus most Canadian airports that are only recovering approximately 10% to 20% of monthly traffic compared to 2019. In response to such loss of traffic, NAV CANADA has taken a number of material cost cutting measures including personnel reductions, scaling back its capital expenditure program and a substantial increase in its rates and fees of 29.5% that became effective September 1, 2020. Liquidity through the next two years to address NAV CANADA’s cash burn will be critical and, with the new note issue, NAV CANADA will further bolster an already solid liquidity position that should be sufficient to see it through our latest expectation for traffic recovery forecast, which is conservative, for the next few years. Moody’s notes that NAV CANADA had repaid material amounts of debt in the last several years while also growing substantially its operations. By reference, NAV CANADA’s weighted charging units grew by almost 46% from its fiscal 2010 to fiscal 2019 year while debt decreased by some 33%, thus creating some ability to incur additional debt through the pandemic. While the additional debt is credit negative, its cost is expected to be very low and it enables NAV CANADA to effectively bridge to a reliable recovery from the airlines in future years of the revenues under-collected during the pandemic. During the recovery period, we would anticipate NAV CANADA being able to generate strong cash flows that can be used for debt reduction.
Given the extensive travel restrictions that are in place in Canada, covid-19 case resurgence, ongoing health related reluctance to travel and economic weakness, Moody’s revised its traffic assumptions for Canadian airports and NAV CANADA. Based on its updated traffic scenarios, Moody’s expects that, in the first quarter of calendar 2021, NAV CANADA’s traffic volume will remain at about 46% of traffic levels in the same period of 2019, and to only grow marginally in the second quarter to end with calendar year 2021 at about 54% of 2019. Moody’s assumes that traffic volumes are unlikely to return to 2019 levels before 2024. There also remains the potential for more challenging downside scenarios, including a deeper reduction in air traffic volumes and a slower than expected recovery if a vaccine is delayed and travel restriction measures cannot be lifted.
While Moody’s expects a sustained weakening in NAV CANADA’s credit profile in the next two years owing to the combined effect of the economic shock of the coronavirus outbreak and the ongoing travel restrictions, Moody’s also expects that NAV CANADA’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, enabling the start of the reduction in the debt incurred during the pandemic. In the meantime, NAV CANADA obtained a waiver from adherence to the rate covenant and certain provisions under the additional indebtedness covenant under both indentures until the end of NAV CANADA’s 2023 fiscal year, which concludes on August 31, 2023.
More generally, once air traffic recovers, NAV CANADA’s ratings will continue to reflect strong fundamentals such as NAV CANADA being the sole civil air navigation service provider in Canada covering a very large airspace, the outright ownership of its assets, and ultimately its unfettered right to set rates, fees and charges to meet its financial requirements.
NAV CANADA is considered a Government Related Issuer (GRI) of the Government of Canada (Aaa stable) with a BCA of aa2 with an assumption of low dependence and low likelihood of extraordinary support from the Canadian government.
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 air transportation 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.
In light of the substantial decline in revenues, NAV CANADA’s liquidity profile over the next several months until the cash burn ends is a key element to the issuer’s credit worthiness. Moody’s views NAV CANADA’s liquidity to be very strong with sufficient levels to comfortably manage through several more months of depressed air traffic activity. As at November 30, 2020, the end of NAV CANADA’s Q1 fiscal 2021, its liquidity consisted of unrestricted cash and short-term investments of CAD465 million (which does not reflect any cash proceeds from the proposed Notes), a one-year, cash funded, debt service reserve fund of CAD73 million (for debt issued under the Master Trust Indenture), an operations and maintenance reserve of CAD275 million, which is sized to approximately three months of operating costs and met by way of an allocation under the committed credit facility, and remaining availability under that credit facility of CAD573 million.
Together, Moody’s expects these liquidity sources, in combination with the cost management measures that have been implemented, will provide NAV CANADA with the ability to withstand the material declines in air traffic that Moody’s expects to see persisting through 2022 or longer.
The Notes issued as General Obligation Notes benefit from liquidity requirements that are equivalent to the ones required under the Master Trust Indenture.
The stable rating outlook reflects Moody’s expectation that NAV CANADA will continue to implement the necessary rate increases to compensate for lower levels of air traffic activity as a result of the coronavirus outbreak and that it will maintain a strong liquidity profile.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Upward rating pressure is unlikely at this stage given the current depressed levels of air traffic activity.
Downward rating pressure could emerge if:
– It appears likely that the coronavirus outbreak will have an even more sustained detrimental impact on traffic levels in the long term, either because of sustained travel restrictions or potential airline failures;
– A materially negative change in the pace of air traffic recovery and/or increased costs, coupled with a reluctance on the part of management to raise rates as required in a timely fashion;
– Any curtailment on the ability of NAV CANADA to set rates at levels sufficient to recover all costs and debt service;
– Cash and unused credit facilities are substantially below the equivalent of six months of revenue on a sustained basis; or
– The issuer is not able to refinance maturing debt issues in the debt capital markets
NAV CANADA is a non-share capital corporation which owns, operates and maintains Canada’s civil air navigation system (ANS), following its 1996 acquisition from the Government of Canada. NAV CANADA operates the ANS through seven area control centres located at Vancouver, Edmonton, Winnipeg, Toronto, Montreal, Moncton and Gander, forty-one control towers, fifty-six flight service stations, seven flight information centres and various other assets across Canada. NAV CANADA is governed by the 1996 Civil Air Navigation Services Commercialization Act (ANS Act). NAV CANADA’s debt is supported solely by the revenue stream the company generates through the provision of air navigation services to operators and aircraft owners within the Canadian controlled airspace. None of that debt is supported either implicitly, or explicitly, by the Government of Canada.
The methodologies used in these ratings were Privately Managed Airports and Related Issuers published in September 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1092224, 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.
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.
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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.
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Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
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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.
The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody’s affiliates outside the UK and is endorsed by Moody’s Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody’s office that issued the credit rating is available on www.moodys.com.
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Catherine N. Deluz Senior Vice President 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
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