Fitch Expects to Rate Aeropuerto Internacional de Tocumen S.A.'s USD625MM Senior Debt 'BBB'

NEW YORK--()--Fitch Ratings expects to rate Aeropuerto Internacional de Tocumen S.A.'s (AITSA) 2016 USD625 million senior secured debt due 2036 'BBB(EXP)' and 'AAA(EXP)(pan)', with a Stable Outlook. Concurrently, Fitch has affirmed the 2013 USD650 million senior secured debt due 2023 at 'BBB', 'AAA(pan)' and 'AAA(slv)', Outlook Negative. Fitch expects to revise the Rating Outlook on the 2013 debt obligation to Stable upon the successful placement of the USD625 million notes.

The rating actions 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 11.3x (calculated based on pledged revenues), under the Fitch rating case the airport is expected to steadily deleverage to the 9x range in the medium term, in line with the rating category, with adequate average coverage of 1.33x. 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 has 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 88% 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 and debt incurrence test of 1.25x and 1.35x DSCR, respectively, and 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 1.33x DSCR through 2020, and leverage, as measured by gross debt to EBITDA (calculated based on pledged revenues), evolves down to the 9x 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 short term, quicker than expected deleveraging in conjunction with a positive sovereign rating action could lead to an upgrade.

SUMMARY OF CREDIT

The 2016 issuance will provide 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 8,000m2 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 53% 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 design-build (DB) contractor, which has a long track record of completing work on time. Fitch does not expect the recent downgrade to 'BB'/Outlook 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 considered remote and 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, growing 4.7% in 2015 to a peak 13.4 million enplanements. 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, which have grown by 2.6% and 5.6%, respectively, in 2015.

As a result of strong enplanement growth, aeronautical revenues, which comprise roughly 2/3 of total 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. Non-aeronautical revenue, primarily generated by rents and commission sales on retail areas and Duty Free shops, experienced growth of 21.6% 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. Under this scenario, DSCR averages 1.48x through 2020 and gross debt/EBITDA falls to 8.63 by 2020 and 5.71x by 2025.

Under the Rating Case, Fitch assumes a six-month 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. With metrics constrained by the debt incurrence test, a new issuance is not assumed in 2018. Under this scenario, coverage averages 1.33x as leverage declines to 9.81x in 2020 and 8.27x by 2025.

Aeropuerto Internacional de Tocumen, S.A (AITSA), established in 2003, owns and operates Tocumen International Airport (the 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 12% of total revenues). Not pledged are revenues derived from regional airports operated by AITSA, advertising, car parking, 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
Primary Analyst
Robert Hirtle
Analyst
+1-212-908-0132
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Patricia Gomez
Director
571-326-9999 ext. 2004
or
Committee Chairperson
Glaucia Calp
Managing Director
+57 1 484 6778
or
Media Relations:
Alyssa Castelli, +1-212-908-0540
alyssa.castelli@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Robert Hirtle
Analyst
+1-212-908-0132
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Patricia Gomez
Director
571-326-9999 ext. 2004
or
Committee Chairperson
Glaucia Calp
Managing Director
+57 1 484 6778
or
Media Relations:
Alyssa Castelli, +1-212-908-0540
alyssa.castelli@fitchratings.com