Canada's Airport Sales Must Go Through Bondholders FirstBy
They’re in catbird seat as government mulls equity-stake sales
‘More expensive flight tickets’ as credit metrics deteriorate
Never mind voters or airport executives. The constituency Canada needs to get on board for any privatization of the country’s airports is its bondholders.
Investors who hold debt in the country’s biggest airports are protected by rules and contracts that would likely require the government to get their consent -- and offer compensation -- before it could change the ownership or capital structure of an airport, according to Jose Saracut, managing director fixed income at Manulife Asset Management.
That’s important because privatization could weaken their credit metrics, according to Moody’s Investors Service. Any downgrade would drive up borrowing costs for future debt issuance, and have a knock-on effect on travelers.
“The credit metrics will deteriorate, the costs after privatization will increase, so someone will have to pay for more expensive flight tickets,” Manulife’s Saracut said.
Justin Trudeau’s government is weighing options for the sale of all or part of Canada’s airports after a federal advisory panel last year suggested it as one way to provide funding for infrastructure projects. A sale of slightly less than half of Toronto Pearson International Airport -- Canada’s biggest, valued at about C$5 billion ($3.7 billion) -- is said to be the easiest option, according to people with knowledge with the matter.
Canada could raise between C$7 billion and C$17 billion by selling equity stakes in the country’s eight major airports, according to a C.D. Howe Institute report. But critics, such as the International Air Transport Association, say that airport privatization is undesirable because it tends to lead to higher costs for airlines and travelers alike.
The airports are operated by non-profit authorities that have long-term land leases with the federal government and the freedom to set rates in order to cover their obligations, including debt payments. If Canada were to move toward private ownership, key issues for the bondholders would include treatment of the land leases, rate policies and the expectation that new private equity owners would require a dividend payment.
Generally, infrastructure bonds require an issuer to always keep a dollar of cash on hand to cover every dollar of interest on the debt, Saracut said. Adding debt to pay a dividend to equity holders or for capital spending could breach debt-service coverage ratio in the trust indenture, Sue McNamara, a fixed-income portfolio manager at Beutel Goodman & Co. who helps manage C$13 billion, said by phone from Toronto.
Most of the airport authorities support an interpretation of airport bond trust indentures in which a change of ownership would require bondholder support, McNamara said. If the government can’t get support, likely by securing at least two-thirds of the votes of bondholders, it would trigger an immediate repayment of the bonds at their call price and the need to issue new debt, she said.
“There seems to be some acceptance by all the airport authorities that bondholders will have a say in this,” she said. Beutel Goodman owns airport bonds.
Airport bonds are considered among the safest type of corporate debt due to strong asset-backing and financial metrics, Saracut said. They would remain investment grade even in the event of privatization, according to Moody’s.
Greater Toronto Airports Authority, the operator of Pearson airport and the biggest Canadian airport issuer, has C$6.2 billion of bonds outstanding that are mostly trading below their call levels. That indicates investors don’t see privatization as an imminent outcome. Long-term GTAA debt offered as much as a 12 percent upside to the call price in early May, according to an RBC Capital Markets report.
Trudeau indicated in an interview with Bloomberg in April that privatization was not an immediate priority for the government.
"We have not put forward a proposal on the matter of airport privatization," said Delphine Denis, a spokeswoman for Minister of Transport Marc Garneau. Requests for comment from the Greater Toronto Airports Authority weren’t immediately returned.
Both McNamara and Saracut said they’re discussing the idea with airports and other stakeholders, and privatization is still possible. To be sure, the government could amend legislation in such a way that disadvantages bondholders, Saracut said. If the airports do end up needing to call bonds and issue new debt, they could also capture some savings as interest rates have fallen since some of the older bonds were sold, he said.
McNamara said she hasn’t observed much selling pressure on airport bonds and that Aeroports de Montreal’s sale of a 30-year, 3.36 percent bond last month went well.
“It stays on the radar screen but it’s probably not imminent right now,” McNamara said of privatization. “If it does, the bondholders will have a say.”
— With assistance by Josh Wingrove