(The following statement was released by the rating agency)
Nov 14 -
Summary analysis -- Flughafen Zurich AG --------------------------- 13-Nov-2012
CREDIT RATING: A/Stable/-- Country: Switzerland
Primary SIC: Airports, flying
Credit Rating History:
Local currency Foreign currency
20-Apr-2012 A/-- A/--
13-Apr-2011 A-/-- A-/--
The ratings on Flughafen Zurich AG (FZAG), the owner and operator of Zurich Airport, reflect Standard & Poor’s Ratings Services’ view of FZAG’s stand-alone credit profile (SACP) of ‘a-', and the moderate likelihood of extraordinary support by the Canton of Zurich (AAA/Stable/--), the largest single shareholder.
In accordance with our criteria for government-related entities (GREs), our view of a “moderate” likelihood of government support is based on our assessment of FZAG‘s:
-- “Strong” link with the Canton of Zurich. The Canton remains a structural shareholder, despite its relatively low stake (33%; or 38% including Zurich City’s stake), and its determination to maintain its influence over FZAG as a shareholder is enshrined in the company’s statutes. Our view of the “strong” link is also based on evidence that the government is committed to providing timely and sufficient support to FZAG in the event of financial distress.
-- Role of “limited importance” for the Canton. In our opinion, the Canton appears more interested in maintaining operations at the airport than in taking measures to maintain or improve FZAG’s creditworthiness.
FZAG’s SACP reflects our view of the company’s “strong” business risk profile and “intermediate” financial risk profile.
The “strong” business risk profile reflects Zurich airport’s position as the major airport in Switzerland, its favorable catchment area, and implementation of supportive Swiss economic regulation. These positive factors are somewhat mitigated by the airport’s high reliance on Swiss International Airlines AG (not rated) and its high share of transfer passengers, which exposes the group to greater competition.
The “intermediate” financial risk profile reflects the group’s balanced capital structure and Standard & Poor‘s-adjusted funds from operations (FFO)-to-debt ratio, which we believe will remain between 20%-30% over the near term. Due to the stability of the airport sector, the financial leverage of the group can be somewhat higher than that described in our criteria “Methodology: Business Risk/Financial Risk Matrix Expanded,” published Sept. 18, 2012. The financial risk profile also incorporates exposure to court-imposed noise-related compensation payments.
S&P base-case operating scenario
Our base-case operating scenario assumes 2.5% and 2% passenger growth in 2012 and 2013, respectively. We also assume that the group will not increase aviation charges in 2012 and 2013. As FZAG has less disruption in its retail segment in 2012 and benefits from a newly developed retail space, we anticipate a spend per passenger increase by 5% in 2012 and 1.5% in 2013, despite the strong Swiss franc and a general squeeze in discretionary spending. Other non-aviation businesses are expected to show revenue growth of about 7%. We forecast overall cost growth for the company of about 4%, resulting in a slight decline in the company’s EBITDA margin in 2012, but a slight improvement in 2013.
S&P base-case cash flow and capital-structure scenario
Under our base-case scenario we expect FZAG to report a FFO-to-debt ratio of about 25% in 2012, after capital expenditures (capex) of about Swiss franc (CHF) 220 million and dividends of about CHF60 million. The adjusted FFO-to-debt ratio could potentially be lower, although in our view above 20%, if the company were required to recognize its liability under the Cantonal Pension fund following recapitalization of the pension fund. We forecast improvement in FZAG’s adjusted FFO-to-debt ratio to 27% in 2013. We do not anticipate that FZAG will undertake major acquisitions or extraordinary shareholder returns.
FZAG’s liquidity profile is “strong” under our criteria as of September 2012 with sources of liquidity exceeding uses of liquidity by more than 1.5x.
As of June 30, 2012, when the last public figures were available, the company’s sources of liquidity according to our estimates include:
-- Company-reported cash of CHF52 million on June 30, 2012;
-- CHF200 million available committed long-term facilities as per our estimate. As per our criteria we do not include facilities with a maturity of less than 12 months; and
-- About CHF400 million of cash flow from operations under our base-case scenario over the upcoming 12 months (after positive working capital movements).
Potential uses of cash include:
-- Capex of about CHF220 million;
-- Cash dividends of about CHF60 million; and
-- Potential noise-related payouts, although we believe that the current balance in the Zurich Noise Fund (Noise Fund) covers any short-term payments.
We also believe that the company has more than 30% of headroom under its financial covenants. In our view, the company also has prudent financial risk management and has strong relations with its banks.
The stable outlook reflects our view that FZAG should be able to maintain itsposition as a regional hub airport, and that it can make its planned investments without its adjusted FFO-to-debt ratio dropping below 20% or its adjusted debt to EBITDA increasing above 3.5x. The stable outlook also reflects our view that we would need to lower the rating on the Canton of Zurich by multiple notches before it would impact the rating of FZAG.
We could take a negative rating action if economic regulation has unforeseen negative consequences post implementation, or if FZAG’s investment in Zurich Airport’s new real estate project, The Circle, coincided with an economic downturn in operating performance, because in this scenario the adjusted FFO-to-debt ratio would likely drop below 20%. The ratings could also come under pressure if the company engages in substantial cash-funded acquisitions or if its performance significantly deteriorates so that performance alone would cause a negative rating action. Such deterioration could occur if the airport experiences an unexpected decline in passenger volumes of up to 10% and EBITDA margins decline to 45% from the 51% anticipated in 2012.
Positive rating movement is unlikely at present. We could, however, consider a positive rating action if the company were to reach and sustain a modest financial risk profile through the investment cycle. Specifically, this could mean increasing adjusted FFO to debt to more than 30%. A modest financial risk profile would be dependent on limited downside from noise liabilities affecting the company’s financial ratios.
Related Criteria And Research
All articles listed below are available on RatingsDirect on the Global Credit Portal, unless otherwise stated.
-- Rating Government-Related Entities: Methodology And Assumptions, Dec. 9, 2010
-- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, May 27, 2009
-- Corporate Ratings Criteria 2008, April 15, 2008