Fitch Rates Aeropuerto Internacional de Tocumen S.A.'s USD575MM Sr. Debt 'BBB'

NEW YORK--()--Fitch rates Aeropuerto Internacional de Tocumen S.A.'s (AITSA) 2016 senior secured debt for USD575 million due 2036 'BBB' and 'AAA(pan)'. The Rating Outlook is Stable.

Fitch has also affirmed AITSA's 2013 USD650 million senior secured debt due 2023 at 'BBB', 'AAA(pan)' and 'AAA(slv)' and revised the Outlook to Stable from Negative following successful placement of the USD575 million notes.

AITSA placed USD575 million 20-year bonds with a coupon of 5.625%. The raised amount is sufficient to fully fund the near-term capital needs for the completion of the south terminal and ancillary works. With lower than expected final financing costs, projected coverage is slightly stronger than Fitch's rating case at the time the expected ratings were first assigned, with rating case average debt service coverage ratio (DSCR) of 1.46x through 2020.

Since Fitch assigned the expected ratings to the 2016 notes on April 22, two developments have occurred that, while important, are not expected to have a material impact on the credit quality of AITSA's financial obligations.

The first was that the U.S. Department of the Treasury's Office of Foreign Assets Control (OFAC) designated Consorcio Grupo Wisa (together with its affiliates that operate duty-free stores at the airport, Grupo Wisa) and various of its owners and other affiliates as Specially Designated Narcotics Traffickers pursuant to the Foreign Narcotics Kingpin Designation Act (Kingpin Act). Grupo Wisa is a duty-free concessionaire at AITSA that generates approximately 7.7% of total airport revenues.

AITSA's CEO represented to Fitch that the airport had not been implicated in any of the above-mentioned allegations nor has it violated any applicable laws that prohibit money laundering activities or any applicable OFAC regulations. AITSA also indicated that it has internal controls at the airport, particularly regarding sales audits, and feels comfortable with the degree of diligence evidenced by them. The CEO also indicated that there are no additional investigations pending. The airport's external financial auditor is Deloitte LLP, and a separate audit is conducted by the General Comptroller of Panama. The airport is a fully-owned government entity with the Minister of Finance of Panama serving as chairman of the board.

The airport stated its intention to terminate its relationship with Grupo Wisa and its affiliates as soon as practically possible. The airport has to follow legal due process, which will determine what legal options are available. However, Grupo Wisa may be forced to wind down operations anyway as it has been and will likely continue to be impacted by the inability to process credit card transactions and retain employees. This will severely constrain cash flow and viability. The estimated timeframe to carry out a competitive bidding process to replace Grupo Wisa is six months. While unlikely, Fitch has conservatively assumed no cash flow recovery during this time period with a gradual subsequent ramp-up. The airport and government are incentivized to facilitate an orderly transition to limit the adverse effects on jobs. The impact on airport financials is marginal and limited to fiscal years 2016 and 2017, offset by the additional pledge of advertising and car parking revenues, which comprise roughly 2% of total revenues.

The second development is the recent downgrade to 'B+' on Rating Watch Negative of Odebrecht Engenharia e Construcao, the holding company of Construtora Norberto Odebrecht S.A., which is the design-build (DB) contractor for construction of the South Terminal. The increased risk of contractor default is offset by ample liquidity through performance bonds from ASSA Compania de Seguros, S.A. and adequate retention relative to remaining costs.

The rating actions continue to reflect the successful execution of indenture modifications to raise additional capital to finance the vital South Terminal expansion and the airport's strategic position as the main gateway to Panama, an established origin and destination (O&D) and transit facility with proven stable and growing demand. The airport's flexibility to adjust tariffs when needed and the manageable turnaround cost per passenger help mitigate a highly leveraged capital structure. Though leverage has significantly increased to 11.08x (calculated based on pledged revenues), under the Fitch rating case the airport is expected to steadily deleverage to the 9x-10x range by 2020, in line with the rating category, with adequate average coverage of 1.46x. Peers include Miami International Airport and Lima Airport Partners, as these hubs each serve as large gateways for Latin American international air traffic.

KEY RATING DRIVERS

Robust Traffic Base in Key Location with High Carrier Concentration [Revenue Risk: Volume - Midrange]: Situated in a strategic and competitive location at the center of the Americas, Tocumen is one of the largest transfer hubs in the region and among the fastest growing in Latin America. It serves as the main international gateway to Panama ('BBB'/Outlook Stable) with an O&D base of over 4 million per year. COPA Airlines and its affiliates constitute over 85% of international traffic and have been a key driver of the airport's strategic and competitive position.

Sound Rate Adjustment Mechanism [Revenue Risk: Price - Stronger]: Tocumen International Airport is managed by Tocumen S.A., an entity wholly owned by the Panamanian government. Rates and charges for airport services are subject only to the approval of the Civil Aeronautics Authority (CAA). Rate-setting does not pose material limits on ability to recover operational and capital costs from aeronautical sources or passenger fees. Tocumen S.A. alone sets the rates for non-aeronautical commercial services and minimum rents. The airport has shown a willingness to increase rates, as demonstrated by the introduction of a new passenger airport investment charge in 2016. Moreover, management has pledged to raise rates, as needed, to maintain the debt service coverage ratio (DSCR) at 1.25x on a 'best efforts' basis.

New Terminal; Demand-Driven Capital Plan [Infrastructure Development/Renewal - Midrange]: Construction of the South Terminal has progressed to approximately 55% project execution, as of March 2016. Substantial completion date has been delayed by nine months, now scheduled for December 2017, due to added services reflecting airline needs. Added capacity is necessary for the airport to accommodate its medium-term traffic forecasts. Completion risk is partially mitigated by the expertise of the design-build (DB) contractor, Construtora Norberto Odebrecht S.A., ample liquidity through performance bonds from ASSA Compania de Seguros, S.A. and adequate retention relative to remaining costs of works remaining. The airport maintains some flexibility in both scope and timing of its capital spending including construction of a third runway and medium-term maintenance needs as generally defined.

Enhanced Security Package [Debt Structure - Midrange]: The 2016 issuance is pari-passu with existing debt and secured by approximately 90% of total airport revenues. Debt is fixed-rate and fully amortizing with a 10-year principal grace period. Structural features are considered adequate with an equity distribution trigger of 1.25x and debt incurrence test of 1.35x minimum/1.60x average DSCR. Adequate reserves include a six-month debt service reserve fund (DSRF), debt payment account, capital expenditure reserve, tax payment account, and operations and maintenance (O&M) reserve. Existing debt is expected to be refinanced to match the same terms.

High Leverage: Under rating case assumptions, coverage averages 1.46x DSCR through 2020, and leverage, as measured by gross debt to EBITDA (calculated based on pledged revenues) evolves down to the 9x-10x range by 2020. While leverage is initially elevated, the nature of upfront investment in new facilities at a major international airport and steady deleveraging in the intermediate term are in line with the rating category. Offsetting considerably higher leverage is significant legal and economic rate-setting flexibility to buttress stable financial metrics.

Peers: The closest regional peer is Lima Airport Partners S.R.L. ('BBB+'/Outlook Stable), an international gateway with a sizable O&D market and less anchor carrier concentration. The closest U.S. peer is Miami International Airport, Florida ('A'/Outlook Stable), as it also serves the Latin American international market and carries elevated leverage at over 10x. Relative to peers, Tocumen benefits from a superior trend in enplanement growth.

RATING SENSITIVITIES

Negative: Inability to deleverage to below 9.0x in the medium term;

Negative: Substantial delays or a material increase in costs to complete the South Terminal;

Negative: A decline in the credit quality of the sovereign rating;

Negative: Significant downsizing in operations from its anchor carrier, COPA Airlines, or a significant loss in passenger enplanements;

Positive: Although viewed as unlikely in the short term, quicker than expected deleveraging in conjunction with a positive sovereign rating action could lead to an upgrade.

SUMMARY OF CREDIT

The airport CEO has directly indicated to Fitch the airport's intention to terminate its relationship with Grupo Wisa and its affiliates as soon as practically possible. The airport is generally capable of terminating concession agreements under breach of any of the following covenants: a default on payment obligations, noncompliance with quality standards, and the use of commercial space for illicit purposes. Due in part to Grupo Wisa's inability to process credit card transactions and operational difficulties it may face processing payroll and restocking inventory, Fitch believes the current economic situation for Grupo Wisa will quickly deteriorate, such that a breach of covenant is all but likely in the near term. Currently, the contract expiration date is set for December 2017. The airport estimates a six-month timeframe to carry out a competitive bidding process to replace Grupo Wisa, which Fitch finds reasonable given the underlying demand for concessions at the airport.

The 2016 issuance of $575 million provides financing for the remaining construction of the South Terminal project, following a brief liquidity shortfall in 2015. The South Terminal expansion will offer an additional 20 gates and over 8,000 square meters of commercial space to the airport providing much needed growth in capacity, to approximately 20 million from 12 million, driven by a positive trend in enplanement growth. Construction has progressed to approximately 55% project execution, with no critical-path issues remaining. As a result of services added to the fixed-price contract, such as the inclusion of additional commercial and rental space, the substantial completion date has been delayed nine months to December 2017.

Completion risk is partially mitigated by the expertise of the DB contractor, which has a long track record of completing work on time. Fitch does not expect the recent downgrade to 'B+' on Rating Watch Negative of Odebrecht Engenharia e Construcao, the holding company of Construtora Norberto Odebrecht S.A., the DB contractor, to constrain current ratings. The risk of contractor default is offset by ample liquidity through performance bonds from ASSA Compania de Seguros, S.A. and adequate retention relative to remaining costs.

Traffic performance has continued its positive trend, with transfer and O&D traffic growing 5.5% and 4.3%, respectively, to a total peak 13.4 million enplanements in fiscal 2015. Compound annual growth rate (CAGR) is 12.7% since 2009. With capacity restraints lifted by the installation of the new terminal, the independent airport consultant forecasts continued traffic growth of 6%-7% annually. Traffic growth is driven mainly by the expanded service of the airport's anchor carrier, COPA Airlines and its affiliates, which comprise 85.7% of carrier market share. Tocumen now services 85 destinations and is expected to service 90 in 2016. Enplanement mix is nearly 100% international traffic with 32% O&D and 68% transit passengers.

As a result of strong enplanement growth, aeronautical revenues, which comprise 62% of total pledged revenue, grew by 14% in 2015. The largest component of aeronautical revenues, the $40 passenger exit fee, is expected to continue its growth with the inclusion of a new airport development fee, also levied on exiting passengers, of $10 in 2016 and $12 in 2017. Pledged non-aeronautical revenues, primarily generated by rents and commission sales on retail areas and Duty Free shops, and which now include advertising and car parking revenues, experienced growth of 11% in 2015. The airport attributes growth to the favorable renegotiation of lease rates with many of its concessionaires. Similarly, renegotiation of service contracts has contributed to the 14% reduction of total expenses (excluding depreciation) in 2015, offsetting the 18% increase in payroll costs mandated by collective bargaining agreements and increased costs related to security requirements.

Fitch's Base Case assumes 4% annual growth to O&D and transit traffic through 2020 and applies a haircut to sponsor elevated revenue forecasts coinciding with the opening of the South Terminal. Fitch also assumes a refinance of the 2013 notes and an additional debt capital raise in 2018 to finance construction of a third runway. A refinance rate premium is applied to these assumptions. Fitch assumes no cash flow recovery in fiscal year (FY) 2016 during the six-month rebidding period to replace concessionaire Grupo Wisa. Under this scenario, DSCR averages 1.57x through 2020 and gross debt to pledged EBITDA evolves down to 8.55x through 2020.

Under the Rating Case, Fitch further assumes a six-month South Terminal construction delay and a stress to O&D and transit traffic by 5% and 10%, respectively, with 2.5% recovery. An additional haircut is applied to sponsor revenue forecasts in 2018. Under this scenario, coverage averages 1.46x as leverage declines to 10.12x by 2020.

Aeropuerto Internacional de Tocumen, S.A (AITSA), established in 2003, owns and operates Tocumen International Airport, which is the principal airport for the country of Panama and the Central American region. Tocumen is located 24 kilometres (15 miles) from downtown Panama City and occupies an area of approximately 1,022 hectares. AITSA is 100% owned by the Republic of Panama, and is governed by a nine-person board of directors, comprising seven voting members and two nonvoting members.

SECURITY

New and existing revenue bonds are secured by net airport revenues, net of non-core components of airport operations (approximately 10% of total revenues). Not pledged are revenues derived from regional airports operated by AITSA and fuel surcharges.

Additional information is available on www.fitchratings.com

Applicable Criteria

Rating Criteria for Airports (pub. 25 Feb 2016)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=877676

Rating Criteria for Infrastructure and Project Finance (pub. 28 Sep 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=870967

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Contacts

Fitch Ratings, Inc.
Primary Analyst
Robert Hirtle, +1-212-908-0132
Analyst
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Patricia Gomez, 571-326-9999 ext. 2004
Director
or
Committee Chairperson
Glaucia Calp, +57-1-484-6778
Managing Director
or
Media Relations, New York
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings, Inc.
Primary Analyst
Robert Hirtle, +1-212-908-0132
Analyst
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Patricia Gomez, 571-326-9999 ext. 2004
Director
or
Committee Chairperson
Glaucia Calp, +57-1-484-6778
Managing Director
or
Media Relations, New York
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com