NEW YORK--(BUSINESS WIRE)--Fitch rates ACI Airport SudAmerica, S.A.'s $200 million senior secured notes 'BB+'. The Rating Outlook is Stable.
The rating reflects the strategic but modest size traffic base, strong O&D share of passenger traffic, limited reliance on revenue growth, and moderate leverage and capacity needs. Fitch also views the recent renewal of the concession by the government to be a credit supportive factor. The issuance is senior at the holding company level, but subordinated to approximately USD60 million of debt at the operating company level.
In a structural change since the issuance of Fitch's expected rating on the notes, the transaction now includes a 'springing guarantee' covenant. This covenant requires the operating company to issue a guarantee of the rated debt following the payment in full of the operating company debt in 2021. Fitch views the inclusion of this covenant as a structural improvement since investors will be able to look directly to the operating company for payment of amounts due. In addition, the rated debt will become pari passu with all senior unsecured debt at the operating company because of the guarantee.
KEY RATING DRIVERS
Important Small-Scale International Gateway [Revenue Risk - Volume: Midrange]: Located in Uruguay's capital city, the airport is the main international gateway of Uruguay with approximately 85% of the country's flights. The airport is almost exclusively an O&D airport with only 2% of passengers transferring to other destinations. Traffic growth since 2004 has been strong averaging 6.2% despite the bankruptcy of the country's flagship carrier, Pluna, and the resulting loss of capacity and status as a regional hub.
No Significant Investments Needed [Infrastructure Development & Renewal: Stronger]: The airport's current capacity of 4.5 million pax/year is well below management's forecast of 3.1 million pax at concession end. Under the amended concession agreement which extended the term of the concession through 2033, the new taxi way construction (USD10 million) was extended until the end of the concession, with no other significant mandatory investments needed in the remaining term.
Inflation and Exchange Adjusted Tariffs [Revenue Risk - Price: Midrange]: Revenues are 95% denominated in USD with Aeronautical revenues being adjusted by a global index that considers foreign exchange and inflation rates. Tariffs do not decrease under the adjustment scheme; however, increases have occasionally been subject to political risk. No increase in tariffs is assumed over the life of the concession.
Limited Exposure to Termination Events: Breach of contract termination events are standard and manageable by the concessionaire; however, a unilateral termination for public interest by the government in the short term (prior to 2018) would leave the transaction exposed to a loss of less than 10% given the debt level and subordinate nature of the issuance. Fitch considers the risk unlikely given (i) the recent extension of the concession and general public good-will for the project; (ii) the increased fee paid by the concessionaire to the government; (iii) the airports operating status with no material infrastructure construction needs; and (iv) the stability of Uruguay as an investment grade country.
Subordinated Fixed Rate Amortizing Issuance [Debt Structure: Midrange]: The issuance is conservatively structured with 100% fixed rate and fully amortizes over the life of the debt, although the amortization schedule is back loaded. All cash flows available to pay debt service for the rated debt are subordinate to the notes issued at the opco level and subject to dividend distribution tests through maturity of the opco notes in 2021. Lock out of dividends is considered highly unlikely as a trigger breach prior to 2021 would require severe stresses with traffic declines in excess of 40%. Should a lock-out occur, the issuance also benefits from deferrable debt service for up to 12 months.
Moderate Financial Metrics: Debt service coverage ratios (DSCR) average 1.82x and 1.72x for the base and rating cases, respectively. Despite strong average coverage ratios for the issuance, coverages in the early years of the transaction life are weaker. Minimum DSCR for the base and rating cases are 1.16x and 1.23x with the minimums occurring in the near term while the senior debt is outstanding. Leverage is considered adequate at 5.6x net debt to EBITDA. No dependence on traffic growth to support debt requirements is needed as break even traffic annual growth rate is negative 1.3%.
The airport's nearest peers include Lima Airport Partners S.R.L.'s (LAP; rated 'BBB+'/Stable Outlook) which serves as an international gateway airport with significant O&D and relatively low leverage. Unlike this peer, Carrasco International Airport has a significantly lower enplanement base and weaker near-term financial coverage ratios which limit the rating in the short term. Should performance come in line with management expectations, higher coverage levels should warrant a risk level more similar to LAP.
--Negative: Repeated failure of the government to approve increases in
regulated tariffs, exposing the issuance to foreign exchange and/or
inflation rate fluctuations that materially affect the cash flow
available to service debt.
--Positive or Negative: Traffic levels materially divergent from base and rating case projections in the mid-to-long term.
--Positive: Steady improvement in debt coverage levels over time may allow for a positive rating consideration.
The issuance is a fixed-rate, fully amortizing financing due to mature in November 2032. The rated debt is subordinated to approximately USD60 million in notes due in 2021 issued from the operating company. The transaction benefits from liquidity provided through a six-month debt service reserve account.
Carrasco International Airport, located approximately 12 miles from downtown Montevideo, is the primary international gateway of Uruguay. The 20-year concession agreement awarded in November 2003 was recently extended for an additional 10-year term and matures in November 2033. The airport's new terminal was inaugurated in 2009 with a capacity of 4.5 million passengers per year, comparing favorably with the current 1.7 million passengers as well as the sponsor's projected 2033 volume of 3.1 million. The operator of the airport is a wholly owned subsidiary of the Corporacion America Group, one of the world's largest operators with 52 operations in Latin America and Europe.
The airport has suffered a number of setbacks in recent years including the failure of the country's flagship carrier, Pluna Lineas Aereas Uruguayas S.A., resulting in the loss of the airport's hub status, and the poor economic performance of the country's neighbors, Argentina and Brazil, which weighed particularly heavily on the tourism industry. Despite these headwinds, the airport has managed to post strong growth averaging over 6% annually since 2004, with an increasing O&D profile, and finds itself in a strong position moving forward.
The Fitch Base Case assumes total passenger activity growth as per the traffic consultant's (ICF) low case (3.3% traffic CAGR through 2033) while cargo volume forecasts considered the ICF base case. Fitch did not consider increases under the Global Index Adjustment; however, this assumption was moderated by the stable currency and inflation assumptions within the cash flow model provided. Fitch considered 1.5% real growth in Duty Free revenues per passenger. Fitch's operating expense assumption considered the management's assumption plus an additional 5%. Under this scenario the minimum DSCR is 1.16x in 2018, with an average financial coverage ratio of 1.82x.
The Fitch Rating Case assumes total passenger activity growth as per the ICF low case with moderation of the front-ended growth over the first 6-years, the management assumption in years 2021-2026, and the ICF low case from 2027-2033 (2.7% traffic CAGR through 2033) while cargo volume forecasts considered the ICF low case. No increases under the Global Index Adjustment were considered. Fitch considered 0% real growth in Duty Free revenues per passenger and no increase in the concession fee beginning in 2024. Fitch's operating expense assumption considered the management's assumption plus an additional 7.5% as well as a 10% stress on all local currency costs to account for a possible short-term revaluation in foreign exchange rates. Under this scenario the minimum DSCR is 1.23x in 2018, with an average financial coverage ratio of 1.72x.
Fitch notes that holding company (holdco) structures that are dependent on dividends from operating companies (opcos) bring an added layer of complexity to the analysis of debt issued at the holdco level. As such, a holistic approach to the analysis of the subordinate debt is necessary. First, cash flows to the holdco can be locked out under certain circumstances, so scenario stresses must be applied at the opco level and tested against the opco triggers. For this transaction, neither of the senior DSCR (1.7x) or leverage (3.0x) tests was breached in any Fitch scenario including break even O&M and traffic cases.
Additionally, Fitch's analysis of the financial ratios of the issuance includes both the subordinate and senior issuances even though the senior debt is outside of the transaction structure. The necessity for this approach is obvious for leverage calculations, but equally important when considering debt service coverage ratios. Fitch primarily utilizes ratios with the total debt service including senior debt issued at the opco, although the holdco-only coverages are also analyzed to ensure that they at least meet the expected level for the respective rating category. This analysis is consistent with Fitch's approach for subordinate issuances within the same trust.
The security package supporting the notes is typical for project financings and include a pledge of 100% of the shares of the operating company, PDS and a covenant to issue a guarantee from the entity; a pledge of 100% of the shares of the holding company, Cerealsur and a guarantee from the entity; the transaction distribution, issuer and debt service accounts; all of the issuer's property, all present and future payments, proceeds and claims of any kind with respect to the foregoing.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Rating Criteria for Infrastructure and Project Finance', July 12, 2012;
--'Rating Criteria for Airports', Dec. 13, 2013.
Applicable Criteria and Related Research:
Rating Criteria for Infrastructure and Project Finance
Rating Criteria for Airports