MONTERREY, Mexico--(BUSINESS WIRE)--Fitch Ratings has assigned a rating of 'BBB+' to Mexico City's Airport Trust's (Grupo Aeroportuario de la Ciudad de Mexico, S.A. de C.V. [GACM]) up to USD6 billion senior secured notes, from which USD2 billion has been issued, and the remainder is expected to be issued through a series of debt issuances between 2017 and 2018. The Rating Outlook is Stable.
The 'BBB+' rating reflects the strength of the transaction's underlying airport asset as a strategic facility for the country, located in an area with strong demographic fundamentals and practically no competition from other airports. The project's flexibility to adjust tariffs when needed and the relatively low turnaround cost per passenger compared to peers compensate for the highly leveraged capital structure, with a maximum debt-to-cash flow available for debt service (CFADS) of 10.70x in Fitch's rating case. Completion risk is largely mitigated by the fact that short- and medium-term debt obligations can be served with the cash flows generated by the current airport and that cost overruns could be covered by a combination of tariff adjustments, discretionary government grants, and the retained flexibility to maximize commercial space revenues.
The rating also considers the fact that the grantor, Secretaria de Comunicaciones y Transportes (SCT), and concessionaires (Aeropuerto Internacional de la Ciudad de Mexico, S.A. de C.V. [AICM] and GACM) are related governmental entities, which are not expected to have leverage maximization as a priority. The debt structure allows for a good alignment of incentives between grantor, concessionaires and creditors, with the latter protected from the adverse effect of the concession ownership changing into private hands. The credit is comparable with Lima Airport Partners, S.R.L. (LAP) and Miami-Dade County, Florida, rated 'BBB+' and 'A', respectively. GACM has a significantly higher leverage than LAP (maximum debt-to-CFADS at 10.70x versus 3.82x), aided by Mexico's economic diversity and strength. Miami International Airport with greater economic strength maintains a higher leverage and is rated 'A'.
KEY RATING DRIVERS
Revenue Risk - Volume: Stronger
Robust Demand in a Strategic Asset: The airport constitutes an essential facility as the gateway to the city and the country. It is a critical asset for the nation and a hub for most Mexican airlines. It is located in one of the world's most populated cities with access to a large and growing base of demand. Mexico City's airport currently services one third of Mexico's passenger air-service demand, transporting over 38 million passengers per year. Traffic volumes track positive for the last two decades barring small reductions in 2009 and 2010 due to the global crisis, with the historical passenger CAGR surpassing that of gross domestic product (GDP).
Revenue Risk - Price: Stronger
Flexibility to Adjust Tariffs: Concession title framework and concessionaires' ownership structure, with both concessionaires and grantor government-owned, ensure the project ample legal flexibility to adjust tariffs when deemed necessary. Historical price raises coupled with strong volume increases indicate an inelastic demand profile. Passenger fees are low compared to the fees being charged in comparable airports, allowing for some room for price increases without significantly affecting demand. The tariff is paid in MXN but linked to the USD and converted on a monthly basis, which minimizes exchange rate risk.
Infrastructure Development & Renewal: Midrange
Saturated Facility in Need of Expansion: There is dependence on the current airport which has aged facilities and significant capacity constraints. The level of investment for maintenance needed during construction of the new airport is small at a USD45 million average per year and is allocated within the overall capital budget of the airport enterprise. Delays in completion of the new airport will have cost implications at this facility but the expectation is that they will remain small relative to the overall investment budget. Fitch expects this assessment to be changed to 'stronger' after successful completion of the new airport.
Completion Risk: Midrange
Completion Does Not Constrain the Rating: Construction works are at a very preliminary stage, which heightens completion risk. Nonetheless, the project's rating is not materially exposed to completion related concerns. The project's essentiality makes its completion a must for the government. The fact that near- to medium-term debt service can be met with the cash flows generated by the current airport reasonably alleviates the risk of delays. Potential cost overruns, on the other hand, would likely be financed by a combination of debt and grants.
Debt Structure: Midrange
Bullet Debt to be Refinanced: Rated debt is a future flow securitisation of passenger charges (TUA). Remnant flows plus other aeronautical revenues different from TUA and non-aeronautical revenues are expected to pay for operating, maintenance and renewal/replacement expenses. Debt structure provides the incentives for tariff adjustment should the need for them arise given the importance of keeping the airport open and functional. Bullet maturities expose the transaction to refinancing risk, which is largely mitigated by a long concession term and ample timing flexibility through staggered maturities. Although there is some exposure to variable interest rates, management has indicated its intention to issue only fixed rate debt, to its best ability. The structure includes a six-month debt service reserve and limitations on additional indebtedness. The lock-up trigger is low at 1.15x. GACM has the ability to raise debt outside of this future flow trust and airport management has not ruled out the possibility for such debt. Fitch considers the airport enterprise's public nature as a meaningful mitigant to this risk, as there are strong incentives to size any such debt commensurate with available revenues such that the enterprise as a whole maintains its stability. Lastly, the existence of change of control protections provides a further mitigant to this structural weakness.
Metrics: Fitch's analysis focused on financial metrics within the future flow trust and the airport enterprise as a whole. Under rating case assumptions, leverage measured as net debt-to-CFADS is 10.70x at the enterprise level once all of the proposed USD6 billion in debt is expected to be issued. While leverage is high, the nature of this upfront investment in new facilities at a major international airport and the likely deleveraging over time make it acceptable at the assigned rating level. Significant legal and economic rate-setting flexibility to offset changed conditions provides additional comfort against significantly higher leverage.
Peers: Lima Airport Partners, S.R.L. (LAP), the airport of Peru's capital city, is rated 'BBB+' and has metrics that are stronger, with 3.82x maximum net debt-to-CFADS. The relative economic diversity and strength of Mexico compensate for higher leverage. In contrast, Miami International Airport (issued under Miami-Dade County, Florida) with greater economic strength and service area diversity, and equivalent rate-setting ability, has 13.31x in leverage and is rated 'A'.
RATING SENSITIVITIES
Positive: An upgrade is unlikely in the short term given the early stage of the construction and execution risk related to the new airport project.
Negative: Downgrade of the Mexican government ('BBB+'/Outlook Stable).
Negative: Significant and continued deviation in traffic/revenue performance against Fitch's base case.
Negative: Considerable delay in the start of operations of the new airport facilities, as it would constrain passenger and revenue growth leading to increased pressure on the generated cash flow.
Negative: Issuance of additional pari passu debt to the extent the repayment of such new debt is not coupled with higher-than-expected revenues and contributes to the deterioration of coverage ratios and leads to leverage approaching 12x.
SUMMARY OF CREDIT
For nearly 20 years, there has been a need to expand Mexico City's airport capacity to make it commensurate with the growth of the country (48-year CAGR of passengers is 5.8% versus 3.6% of GDP). As a response, the National Infrastructure Plan 2013-2018 established as one of its primary objectives to provide a long-term solution to the constant growing demand for aeronautical services in central Mexico.
Hence, in September 2014, the Federal Government through the Ministry of Transportation (SCT), granted GACM a 50-year concession to build and operate a new airport in Mexico City (the project), which will be built in several phases. Each phase will be reached as the number of passengers increases. Current financing is proposed to be used to build only the first phase, which is expected to alleviate transportation needs until 2025.
The construction of the airport is projected by the issuer to require an investment of USD13.3 billion, from which approximately 60% will be funded through governmental resources from the federal government (60%). The remaining 40% will be funded through private debt for up to USD6 billion, out of which USD2 billion has already issued, while the rest is expected to be placed in the international markets between 2017 and 2018.
The USD2 billion senior secured notes were issued in two bullet series for an equal amount of USD1 billion. The first series has a 10-year term and accrues interest at a fixed rate of 4.25%, while the second series has a 30-year term and accrues interest at a fixed rate of 5.5%. The debt series mature in October 2026 and 2046, respectively.
Debt is backed by USD-denominated passenger fees from the current facility and, once built, from the new airport. Debt was issued by a trust (Mexico City Airport Trust) that isolates the project's cash flows from other parties' risks. The issuer trust, in turn, assigned the collateral for the benefit of creditors to a separate trust, which will directly receive the TUA and apply it to make debt service payments and to fulfill a six-month debt service reserve fund (DSRF), if needed. Excess cash can be released back to the issuer, and then to the concessionaires if certain covenants are met. Along with the cash distributions from the issuer trust, the project also generates revenues from non-aeronautical and other services, which will be used for operating purposes.
For the first three to five years, the rated notes will coexist with a USD3 billion revolving credit facility used to partially fund construction, which will be later refinanced to long-term with part of the rated debt.
The concessionaire has indicated its intention to keep most or all of the debt at a fixed interest rate. According to the legal structure, the issuer is allowed to issue variable-rate debt, but it shall procure that the unhedged amount does not exceed USD3 billion at any time.
Regarding additional indebtedness, the debt structure rules no further debt can be issued or incurred if after giving pro forma effect to such the average DSCR for the two quarters preceding is equal to or greater than 1.20x, or the concession life-coverage ratio is equal to or greater than 1.20x at the time of the incurrence. Fitch considers this structural feature to be weaker given that such DSCR would be calculated on interest payments only.
In 2015, total airport traffic grew 12.2% and reached 38.4 million passengers. This was driven by a similar growth in national and international passengers, which increased 12.8% and 10.9%, respectively. During this year, traffic increased as airlines accommodated demand in the constrained airport environment through higher passenger (pax) per Air Traffic Movement (ATM) and, also due to the introduction of new international services to North America and South America. As of June 2016, traffic has grown 7.8%.
In 2015, the USD-equivalent of total airport revenue grew 4% to reach USD641 million, driven not only by traffic performance, but also by an increase in TUA revenue of 13.8%, which was offset by a decrease in the USD-equivalent of commercial and aeronautical services revenue of -9.8% and -5.6%, respectively. As of June 2016, USD-equivalent of total airport revenue increased 2.7%, driven by a 14.1% increase in TUA revenues, offset by a -9.3% and -10.2% decrease in commercial and aeronautical services revenue in USD-equivalent. The decrease of non-TUA revenue in the last 18 months was due to the depreciation of the MXN versus the USD given those revenues are denominated in MXN.
Fitch projections consider the USD2 billion already placed and the remaining USD4 billion and assumed the rest to be placed in a number of bullet debt instruments with terms between five and 30 years at fixed interest rates.
Fitch's Base Case assumed traffic projections prepared by consultant firm Arup except for 2021 to 2023, when growth rates were assumed at 90% of the forecast. For the rest of the years, growth rates were not discounted as those numbers were deemed conservative. TUA increases only at U.S. inflation of 1.5% for 2016, 2.5% for 2017 and 2018, and then 2% fixed. Mexican inflation at 3.6% for 2016, 3.2% for 2017, 3.1% for 2018 and then 4% fixed. ASA payments were assumed not to be made by the project upon the subordination clause contained in the respective services agreement. Operational expenses are at budget plus 5%. Rating sensitivities were applied to fixed interest rates at the levels indicated in the issuer's financial model and refinancing rates,in accordance with Fitch's criteria.
In its analysis, Fitch used credit metrics calculated considering consolidated revenues and costs and expenses of both the debt trust and the airport and adding ASA payments back to CFADS, treated as 'Consolidated'.
Under Fitch's Base Case leverage is calculated at 10.65x, while the loan life coverage ratio (LLCR) in 2019 (once the total debt is issued) is 1.70x, both on a consolidated basis.
Fitch's Rating Case assumptions are as in the Base Case except for traffic growth rates in years 2021 to 2023, when a 20% discount was applied to the forecast of Arup. Operational expenses are expected to be at budget plus 6% in 2016-2019 while the old airport is still operating, 7.5% in 2020-2025, 7% in 2026-2030 and 6% in 2031 onwards. Variable rate was projected to be as in the Base Case plus 1%. Refinancing interest rates were also increased.
Under Fitch's Rating Case leverage is calculated at 10.70x, while LLCR in 2019 (once the total debt is issued) is 1.31x, both on a consolidated basis.
Fitch believes the project may benefit from several upsides. Compared to others, the Mexico City airport charges cheaper tariffs to airlines and passengers, which suggests there is some room for future price increases. Also, projections were prepared assuming commercial revenues behave as historically, meaning they do not take into account the current below-par offering at the airport with non-aeronautical revenues growth potential likely understated.
In June 1998, the Federal Government granted a 50-year concession to AICM to operate the existing Mexico City International Airport. The concession would end in November 2048 with an extension option for an additional 50 years until 2098. AICM is a subsidiary of GACM, which is a state-owned company and now concessionaire of the new airport to be built.
SECURITY
The notes have a first-priority security interest over: i) the right to collect passenger charges for the use of the existing airport and, upon the commencement of commercial operations, the new airport, ii) the proceeds of insurance with respect to the interruption of operations, iii) indemnities in connection with expiration events affecting the airports, iv) proceeds of security bonds payable by the airlines, v) the amounts deposited in the trust accounts, and vi) all other property contributed to the trust for the benefit of the secured credits. The notes are not obligations of, or guaranteed by, the Mexican government.
Additional information is available on www.fitchratings.com.
Applicable Criteria
Rating Criteria for Airports (pub. 25 Feb 2016)
https://www.fitchratings.com/site/re/877676
Rating Criteria for Infrastructure and Project Finance (pub. 08 Jul 2016)
https://www.fitchratings.com/site/re/882594
Additional Disclosures
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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1013627
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