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June 16 (The following statement was released by the rating agency)
Fitch Ratings has affirmed Sydney Airport Finance Company Pty Limited's senior secured bank debt and bonds at 'BBB'. The Outlook is Stable.
The affirmation takes into account Sydney Airport's strong asset profile as seen by its long-term resilience and steady growth in revenue and passenger numbers. As Australia's largest airport, serving the greater Sydney population of 4.8 million, it is a major gateway to Australia with international passengers representing 41% of Australia's total. The rating is constrained by moderately high leverage and a high, but manageable, refinancing requirement.
KEY RATING DRIVERS
Sydney Airport has predominantly O&D traffic, and is the only major airport serving the greater Sydney region. The airport serves 39 airlines in total with moderate carrier concentration with the Qantas Group and Virgin Group. While domestic traffic growth has been subdued at 1.2% CAGR over the past three years (2011-2013), average growth of international traffic (which is around four times as profitable per passenger) has been robust at 4.0%, driving total revenue CAGR of 5.7%. Momentum is increasing toward a second airport in the Sydney region, which could create a competitor in the future. However, Sydney Airport has the first right of refusal over the development rights for the second airport, which is not expected to be operational before the mid-2020s at the earliest. Fitch has assessed the Volume Risk attribute as Stronger.
Unlike some large peer airports in Europe or the US, pricing at Sydney Airport is not regulated. The airport is free to negotiate commercial agreements directly with airline customers, subject only to monitoring by the government.
Nonetheless, given the generally weak financial profiles of the airline carriers, the ability to maximise revenues by raising passenger charges is judged to be limited. Therefore, Fitch assesses the Price Risk attribute as Midrange.
Infrastructure Development and Renewal risk is assessed as Midrange. Annual improvements are required and planned but are broadly volume-driven. There is some flexibility to defer capex, if required. The 'Necessary New Investment' (NNI) framework allows for recovery of growth capex through aeronautical charges. All of growth capex is expected to be debt funded, although it could be funded from cash flows if equity distributions were decreased. Sydney Airport expects to invest AUD1.2bn on growth capex from 2014-218, however there is some uncertainty around the timing and quantum of investment after 2018.
Sydney Airport's debt structure consists mainly of bullet maturities, which creates refinancing risk. However, Sydney Airport has successfully accessed the capital markets on multiple occasions, extending its average debt tenor and spreading maturities over numerous years. Management has a proven record of successfully managing refinancing well in advance, as evidenced by the May 2014 AUD2.5bn financing in the Euro bond and Australian bank markets. Nonetheless, tight liquidity in financial markets brought about by crises situations (such as the GFC) could push up costs significantly even if access to funding is not completely blocked. Reserve accounts, liquidity lines and distribution triggers help reduce the risk somewhat. Overall, the Debt Structure Risk attribute is assessed as Midrange.
Net Debt/EBITDA was 7.0x for 2013 and stays in the 7.0-7.3x range over the 10-year forecast period in Fitch's Rating Case, which assumes annual passenger growth between 1.5% and 2.4% over the next 10 year forecast period. Fitch's Traffic Stress Case, which reflects sharp (5%) declines in traffic in each of the next two years, results in Net Debt/EBITDA increasing to more than 8x in 2015-17, then falling back below 8x as traffic is assumed to recover somewhat.
Management does not intend to amortise debt, preferring equity distributions instead, and growth capex is likely to be fully debt funded. The minimum ICR (over 10 years) in the Rating Case is 1.8, well above the 1.4x lockup ratio.
Fitch compared Sydney Airport with international peers of similar leverage, notably Heathrow, Gatwick, Brussels and Copenhagen. Sydney Airport experienced much lower traffic volatility than the other airports in the higher leverage bracket. This reflects the airport's quite distinct economic drivers, notably the growth in international travel from Asia and the solid performance of the Australian economy. However, the airport's resilience to a major downturn in these factors is yet to be established.
A rating downgrade could result from evidence of Net Debt/EBITDA, increasing to above 7.5x at a sustained level. Any inability to refinance debt in advance of maturities could also put downward pressure on the rating. On the other hand, steady deleveraging, coupled with the extension of the debt maturity profile, could result in a rating upgrade if it results in Net Debt/EBITDA below 6.5x. Fitch will monitor the development progress of the new airport in Sydney, in particular any agreements with regard to how the airport would be funded and its regulatory and commercial framework.