TEXT-S&P raises Dublin Airport Authority rating to 'A-2'

Wed May 23, 2012 11:07am EDT

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	
	
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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 	
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