TEXT-S&P summary: The Manchester Airport Group PLC

Sept 25 -

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Summary analysis -- The Manchester Airport Group PLC -------------- 25-Sep-2012

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CREDIT RATING: A/Negative/-- Country: United Kingdom

Primary SIC: Airports, flying

fields, &

services

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Credit Rating History:

Local currency Foreign currency

07-Apr-2005 A/-- A/--

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Rationale

The ratings on U.K.-based airport operator The Manchester Airport Group PLC (MAG) reflect Standard & Poor's Ratings Services' assessment of the group's business risk profile as "strong" and financial risk profile as "modest."

We regard MAG as a government-related entity (GRE) because of its full ownership by 10 U.K. city councils (Manchester City Council is the controlling shareholder, with 55%). The 'A' rating on MAG is based on its stand-alone credit profile, which we assess at 'a', as well as on our opinion that there is a "moderate" likelihood that MAG's government shareholders would provide timely and sufficient extraordinary support in the event of financial distress.

In accordance with our criteria for GREs, our view of a "moderate" likelihood of extraordinary government support is based on our assessment of MAG's:

-- "Important" role for its shareholders. We base our view on the essential infrastructure nature of the group's main asset, Manchester Airport, as a key element of Manchester's open and service-oriented economy. In the event of a change in ownership, which could entail the addition of shareholders and potentially another airport, we could reassess our view of the importance of MAG's role to the new shareholder group. Consequently, we could revise the role to "limited."

-- "Limited" link between MAG and the city councils because the group operates on a stand-alone basis. Although the councils are involved in high-level strategic decisions, we believe they act much like standard corporate shareholders; they are primarily interested in MAG's operations and regular dividend payments rather than in its credit standing.

The "strong" business risk profile reflects MAG's relatively diversified airline customer base and solid commercial operations as well as its good catchment area. However, competition from airports in the region and material exposure to the price-sensitive U.K. leisure market, as well as charter airlines, in our view mitigate these strengths somewhat.

The "modest" financial risk profile reflects Standard & Poor's-adjusted funds from operations (FFO) to debt of about 35% in the financial year to March 31, 2012, which is underpinned by our treatment of its shareholder loan as equity.

In the near term, we think that MAG's ownership structure could change. This is because the shareholders have recently stated that they may want to bring in additional equity if MAG makes an acquisition. Any change in ownership could cause us to reassess our treatment as equity of the approximately GBP163 million shareholder loan. Such a change is likely to lead us to reassess our treatment of the airport lease between MAG and its shareholders; we currently treat this lease as equity. Finally, we could also reassess the likelihood of extraordinary government support.

S&P base-case operating scenario

In our view, the poor macroeconomic outlook may constrain passenger numbers for Manchester Airport Group. The volume of air travel usually moves in the same direction as GDP and therefore we anticipate slowing demand in 2012. We recently lowered our growth forecast for real GDP in the U.K. to 0.3% in 2012, and we estimate that the eurozone will experience a GDP decline of 0.6%. (For more information, see "The Curse Of The Three Ds: Triple Deleveraging Drags Europe Deeper Into Recession, published July 30, 2012 on RatingsDirect on the Global Credit Portal.) Furthermore, close to 80% of passengers at MAG's main airport, Manchester Airport, are leisure travelers, who are more sensitive to prices than business travelers. However, we believe that in the short term, the group could grow its volumes above GDP if it is successful in regaining share from competing airports.

Our base-case operating scenario incorporates traffic growth of 1%-2% for the financial year-ending March 31, 2013. This is a decline from solid traffic growth of about 6% in the financial year-ending March 31, 2012.

Our forecast for 2013 includes the impact of British Airways PLC's (BB/Stable/--) decision to close down BMI Baby after acquiring it from Deutsche Lufthansa AG (BBB-/Stable/--). MAG has been successful in replacing the lost volumes by bringing additional flights from airlines such as Flybe and Monarch. Importantly, MAG benefits from a wide customer base, with no single airline accounting for more than 10% of the airport's total revenues in financial year 2010-2011.

Our base-case scenario also incorporates a modest increase in aeronautical yields due to modest price increases in airport tariffs, which is offset by the growing presence of low-cost carriers (LCCs) at the airport. The additional passengers and LCC flights are likely to be added in lower-yielding off-peak hours. More positively, we think that the commercial operations will remain relatively solid.

S&P base-case cash flow and capital-structure scenario

We anticipate that MAG's Standard & Poor's-adjusted funds from operations (FFO) to debt will remain at about 35% for the year-ending March 31, 2013, which is the minimum level we consider to be commensurate with the current rating.

We anticipate that the company's capital expenditures will be about GBP80 million over the next couple of years and that the company will be free operating cash flow positive. However, due to ongoing payments to shareholders, we anticipate that MAG will be discretionary cash flow negative.

Liquidity

We classify MAG's liquidity as "strong" under our criteria. Our assessment primarily reflects the lack of near-term debt maturities and modest debt amortization payments. According to our calculations, sources of funds will exceed uses by about 2x in the next 12 months to June 30, 2013, and in the following 12 month period.

We calculate the main sources of funds, as of June 30, 2012, to include:

-- About GBP1 million of cash;

-- GBP112 million available under committed long-term bank facilities; and

-- About GBP95 million of operating cash flows.

We calculate the main uses of funds, as of the same date, to include:

-- GBP80 million of capital expenditures; and

-- GBP20 million in dividends expected to be paid to shareholders.

There are no debt maturities in the next 12 months.

In accordance with our criteria, we assess the following as relevant aspects of MAG's liquidity:

-- We expect that liquidity sources would remain positive, even with a 30% drop in EBITDA.

-- We anticipate that MAG will remain in compliance with its financial covenants, with a 30% cushion. The RCFs and term loan are governed by two financial covenants: maximum net debt to EBITDA of 4x and minimum interest coverage of 3x.

-- We view the company's relationship with its banks to be solid and well-established.

-- We consider the company's risk management to be prudent.

Outlook

The negative outlook reflects our view that, although recent performance has been robust, weakening macroeconomic conditions and competition from both other airports and alternative forms of transport could weigh on MAG's profitability and cash flow.

We could lower the rating if adjusted FFO to debt falls to less than 35%, the minimum level that we view as commensurate with the current rating. This could occur as a result of a change in financial policy, possibly combined with an acquisition or a much higher level of investment.

Furthermore, we could lower the rating on account of operating underperformance. For example, if passenger volumes fall below what we forecast in our base-case scenario, or margins decline, this could weaken our assessment of MAG's business risk profile. In the economic downturn of 2008-2009, MAG's performance was somewhat weaker than its rated peers with "strong" business risk profiles.

Conversely, we could revise the outlook to stable if MAG is able to sustain the current improvement in passenger traffic over the next 12 months and improve its profitability. An improvement in profitability could include margins closer to the historical level of 40% and an increase in cash flow such that we believe MAG likely to maintain adjusted FFO to debt of more than 35% on an ongoing basis.

Related Criteria And Research

All articles listed below are available on RatingsDirect on the Global Credit Portal, unless otherwise stated.

-- Economic Research: Assessing The Severity Of The Eurozone Recession Is A Close Call, Jan. 31, 2012

-- Rating Government-Related Entities: Methodology And Assumptions, Dec. 9, 2010

-- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, May 27, 2009