TEXT-S&P Assigns Latin American Airports Holdings Ltd. 'BB-' Rtg
-- Dominican Republic-based airport operator Aerodom plans to issue seven-year senior secured notes for up to $550 million.
-- Aerodom's ultimate owner, Bermuda-based Latin American Airports Holdings, will guarantee the issuance.
-- We are assigning our 'BB-' corporate credit rating to Latin American Airports Holdings and a 'BB-' issue-level preliminary rating to Aerodom's proposed senior secured notes.
-- The stable outlook incorporates the manageable debt burden on a consolidated basis in the short to medium term and our expectation that cash flows from Aerodom and Fumisa, will improve during the next two to three years.
On Oct. 25, 2012, Standard & Poor's Ratings Services assigned its 'BB-' corporate credit rating to Latin American Airports Holdings Ltd. (LAAH). We also assigned a 'BB-' preliminary rating to Aeropuertos Dominicanos Siglo XXI S.A's (Aerodom) seven-year senior secured notes for up to $550 million. The outlook is stable. The assignment of a final rating will be subject to our review of final documentation, including the guarantee contract.
The rating on LAAH reflects the credit quality of its operating subsidiaries and the company's "fair" business risk profile and "aggressive" financial risk profile. In addition, the preliminary rating on Aerodom's notes reflects our view of the company's controlling shareholder's creditworthiness, which provides an unconditional and irrevocable guarantee of both principal and interest payments. Our equalization of the rating on the notes with the rating on LAAH reflects our view that the guarantee qualifies for rating substitution treatment.
Advent International Corp., which owns 86% of LAAH, founded the company in 2007 to invest in airport infrastructure assets in Latin America. The company's assets are Aerodom and Inmobiliaria Fumisa S.A. de C.V. (Fumisa), both of which Advent controls 100% of shares.
Aerodom owns the concession for 30 years, which the government awarded in April 2000, for the operation and administration of five international airports and one domestic airport in the Dominican Republic (B+/Stable/B). Aerodom holds the concession for Las Americas Airport, located in Santo Domingo, the second most active airport in the country after Punta Cana in terms of passenger traffic. In addition, this airport contributes more than 80% of Aerodom's total revenue in 2011. Aerodom's six airports accounted for 42% of the country's air traffic (4.15 million of passengers) in 2011. As most other airport operators, Aerodom charges fees for using the premises and for certain aeronautical services for passengers and aircraft. Those revenues are mostly regulated and subject to maximum tariffs: as of December 2011 almost 74% of Aerodom's revenues came from this segment. It also generates revenue from commercial activities performed in the airports.
Assuming annual conservative passenger traffic growth rates after 2012 of about 2.5% and cost increases in line with inflation, we expect Aerodom will be able to generate funds from operations of about $55 million - $60 million and maintain good profitability margins during the next two to three years. As Aerodom completed its capital expenditure plan, as part of the concession agreement, future investments will be minor. On the other hand, Fumisa holds a master lease agreement with Mexico City International Airport (AICM), the second busiest airport in Latin America, that gives the company exclusive rights to sublease approximately 38,000 square meters of retail and commercial space within the international wing of terminal 1 and certain land-side areas of the domestic section of this terminal, to operate more than 2,100 parking spaces and 11 passenger boarding bridges in terminal 1. Although this lease is scheduled to expire on Dec. 31, 2013, Fumisa is seeking to obtain an extension. Under our base-case scenario, we expect the lease to be extended for at least 10 more years based on current rent levels indexed every year. Under that scenario, we expect the company will be able to generate an FFO of about $45 million - $50 million in the next two years.
From a consolidated standpoint, we expect LAAH will maintain its current cash generation and adequate cash flow protection metrics mainly as a result of favorable fundamentals for passenger traffic at Aerodom- and Fumisa-operated airports. We project consolidated debt to EBITDA of 4x for 2012, converging to 3.5x by 2014, EBITDA interest coverage of 2.5x-3.0x, and funds from operations (FFO) to total debt of 25% during the next three years. As the new covenants will allow LAAH to increase debt levels until they reach on a consolidated basis a 4.0x debt to EBITDA, we expect Fumisa will raise some additional debt by 2014.
We assess LAAH's consolidated liquidity as "adequate." On a consolidated basis, as of June 2012, LAAH's cash reserves totaled $39.5 million. Our assessment of liquidity is based upon the following assumptions:
-- We expect sources of liquidity (including cash and internally generated cash flow) should exceed uses by at least 1.2x over the next two years;
-- We expect that liquidity sources will continue to exceed uses and the company to comply with its covenants, even if EBITDA were to decline by 20%; and
-- LAAH will be able to absorb low probability adversities in the next two years without incurring in additional indebtedness. Under our base-case scenario, we expect a consolidated EBITDA in the range of $135 million - $150 million for the next three years that coupled with its cash reserves will allow LAAH to maintain a manageable capital expenditure plan, its working capital needs, and the annual dividend payout of about 50% of net income.
During the next 12 months, we expect LAAH will distribute a $325 million extraordinary dividend to its parent that will result in negative discretionary cash flow. Funds for that onetime dividend will come from Aerodom's $550 million issuance. We believe the dividend policy will become more stable.
The stable outlook incorporates the manageable debt burden on a consolidated basis in the short to medium term and our expectation that cash flows from Aerodom and Fumisa will improve during the next two to three years. We also anticipate that Fumisa will secure an extension of its master lease agreement.
An unfavorable conclusion of the negotiations to extend Fumisa's master lease agreement that could jeopardize LAAH's cash flow would lead to a negative rating action. An upgrade is unlikely at this point and would depend mainly on the conditions under which Fumisa renegotiates its contracts with main tenants. If conditions are favorable enough and result in an improvement of LAAH's cash flow generation capacity that leads to debt to EBITDA of less than 3.0x and FFO to total debt of more than 35%, we could raise the ratings.
Related Criteria And Research
-- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, Sept 18, 2012
-- Methodology and Assumptions: Standard and Poor's Liquidity Descriptors for Global Corporate Issuers, Sept. 28, 2011
-- 2008 Corporate Ratings Criteria, April 15, 2008
-- Corporate Criteria--Parent/Subsidiary Links; General Principles; Subsidiaries/Joint Ventures/Nonrecourse Projects; Finance Subsidiaries; Rating Link to Parent, Oct. 28, 2004
Latin American Airports Holdings Ltd.
Corporate Credit Rating BB-/Stable/--
Aeropuertos Dominicanos Siglo XXI S.A
Senior Secured BB-(prelim)/Stable
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