TEXT-S&P raises Dublin Airport Authority rating to 'A-2'
May 23 - Overview -- On May 15, 2012, Standard & Poor's Rating Services published new criteria that link short-term and long-term ratings for corporate issuers through the use of liquidity descriptors. -- In accordance with the new criteria, we are raising our short-term corporate credit rating on Ireland-based airport operator Dublin Airport Authority PLC (DAA) to 'A-2' from 'A-3'. -- At the same time, we are affirming our 'BBB' long-term corporate credit and issue ratings on DAA. -- The negative outlook reflects our view that DAA's financial risk profile could deteriorate if passenger levels decline and/or Ireland's economic and political conditions weaken. Rating Action On May 23, 2012, Standard & Poor's Ratings Services raised its short-term corporate credit rating on Ireland-based airport operator Dublin Airport Authority PLC (DAA) to 'A-2' from 'A-3'. At the same time, we affirmed our 'BBB' long-term corporate credit and issue ratings on DAA. The outlook is negative. Rationale The upgrade results from the implementation of our new criteria that link short-term and long-term ratings for corporate issuers through the use of liquidity descriptors. (See "Methodology: Short-Term/Long-Term Ratings Linkage Criteria for Corporate and Sovereign Issuers," published May 15, 2012, on RatingsDirect on the Global Credit Portal.) Under our new criteria, the short-term corporate credit rating on an issuer with a long-term corporate credit rating of 'BBB' and "strong" or "adequate" liquidity is 'A-2'. The short-term corporate credit rating on DAA previously took into account the negative outlook on the company. Under our new criteria, a negative outlook no longer constrains the short-term rating on a corporate issuer. Our 'BBB' long-term corporate credit rating on DAA reflects its stand-alone credit profile (SACP), which we assess at 'bbb'. The SACP is underpinned by DAA's "strong" business risk profile, and is tempered by its "significant" financial risk profile. The long-term rating also reflects our opinion that there is a "moderate" likelihood that the Republic of Ireland (BBB+/Negative/A-2) would provide timely and sufficient extraordinary support to DAA in the event of financial distress. We have revised upward our assessment of DAA's role for the Irish economy to "important" from "limited," to better reflect its strategic role in relation to air access and general economic development in Ireland. Our view of DAA's "important" role also reflects the importance of its credit standing to the Irish government as shown by the government's continuation of supportive financial policies toward DAA during a period when significant banking sector contingent liabilities crystallized on the government's balance sheet and the government required a financial assistance package. For example, the government did not request that DAA pay dividends that would have reduced the company's cash balance. We assess DAA's link with the Irish government as "limited." This is because, although the Irish government owns 100% of DAA's capital, it is government policy that DAA should operate on a commercial basis. DAA's credit metrics are at the lower end of the range that we consider commensurate with the 'BBB' rating, which includes Standard & Poor's-adjusted funds from operations (FFO) to debt of at least about 15%. The base-case credit scenario underpinning our rating on DAA incorporates a slight increase in the number of passengers travelling at DAA's three airports in 2012, which in our view will support an FFO-to-debt ratio of about 16% in 2012. However, declines in traffic volumes, notably at Dublin Airport, which generated three-quarters of the DAA's EBITDA in 2011, could depress DAA's credit metrics to levels that are no longer commensurate with the rating. This could be triggered by the deterioration of economic conditions in Ireland, which we view as the key driver of air traffic volumes. On May 9, 2012, the Irish government announced plans to separate Shannon Airport from DAA and join it with Shannon Development to form a single entity. The terms and timing of this separation have not yet been decided, and we have therefore not incorporated this event into our base-case scenario. Shannon Airport contributed less than 5% of DAA's consolidated EBITDA in 2011. While a separation would marginally lower DAA's ability to generate cash, it would also reduce investment needs--Shannon Airport's capital expenditures in 2011 were about the same level as its EBITDA. In our opinion, the impact of a separation on DAA would depend primarily on whether Shannon Airport's share of DAA's debt--about EUR100 million--is retained by the airport or assumed by the state, and whether any cash is transferred from DAA to Shannon Airport at the time of separation. Liquidity The short term rating on DAA is 'A-2'. We assess DAA's liquidity as "strong" under our criteria, underpinned by significant cash balances and modest debt repayments in the medium term. We estimate that liquidity sources will cover uses by more than 4x for the 12 months from March 31, 2012, and we forecast that this ratio will remain more than 1x for the following 12 months. We calculate total sources of liquidity of approximately EUR700 million over the next 12 months, comprising: -- Surplus cash and cash equivalents of about EUR435 million; -- Forecast FFO of about EUR115 million; and -- Availability of EUR150 million under a revolving credit facility expiring in December 2016. DAA also benefits from an undrawn EUR150 million facility maturing in July 2012. Given the short-term nature of the latter commitment, we exclude it from our liquidity calculations. We assess liquidity uses over the period of about EUR160 million, comprising: -- Maturing debt of about EUR20 million; and -- Forecast investments and working capital needs of about EUR140 million. We do not forecast any dividend payments in 2012. We understand that DAA's financing arrangements, including its undrawn bank lines, are free of financial covenants and rating triggers. However, we note that the company's European Investment Bank facilities--which account for one-half of outstanding debt--could be renegotiated if DAA were privatized. Outlook The negative outlook reflects our view that DAA's financial risk profile could deteriorate if passenger traffic at its airports is not sustained in the near term. We believe that the company's financial risk profile would also come under pressure if economic and political conditions in Ireland deteriorated, since DAA is 100% owned by the Republic of Ireland and the vast majority of its earnings is regulated and originates domestically. In addition, the planned separation of Shannon Airport from DAA could further weaken DAA's credit metrics, notably if it includes the provision of cash to Shannon Airport by DAA and takes place in the near term when DAA's credit metrics are at the lower end of what we consider to be commensurate with the current rating. We could consider taking a negative rating action if adjusted FFO to debt fell to less than about 15%, for instance due to a weaker economic environment than we currently forecast, or due to changes in DAA's structure. We could also lower the rating if the owner or management of DAA changed the company's financial policy to entail a material reduction in the surplus cash balances that currently support DAA's "significant" financial risk profile and "strong" liquidity. Furthermore, downward rating pressure could arise if DAA's profitability weakened to a level no longer commensurate with our assessment of a "strong" business risk profile. Conversely, we could revise the outlook to stable if Ireland's macroeconomic and political environment stabilizes, if passenger traffic at Dublin Airport begins to increase, and if the company's profitability continues to improve. Related Criteria And Research All articles listed below are available on RatingsDirect on the Global Credit Portal, unless otherwise stated. -- Methodology: Short-Term/Long-Term Ratings Linkage Criteria for Corporate and Sovereign Issuers, May 15, 2012 -- Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011 -- General Criteria: Nonsovereign Ratings That Exceed EMU Sovereign Ratings: Methodology And Assumptions, June 14, 2011 -- Principles Of Credit Ratings, Feb. 16, 2011 -- Stand-Alone Credit Profiles: One Component Of A Rating, Oct. 1, 2010 -- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, May 27, 2009 -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008 -- 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008 -- Ratings On Ireland Affirmed At 'BBB+/A-2' On Crisis Response; Outlook Remains Negative, April 26, 2012 -- No Fast Lane Out Of Europe's Recession, April 4, 2012 Ratings List Ratings Affirmed; Upgraded To From Dublin Airport Authority PLC Corporate Credit Rating BBB/Negative/A-2 BBB/Negative/A-3 DAA Finance PLC Senior Unsecured Debt* BBB BBB *Guaranteed by Dublin Airport Authority PLC Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column.
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