OREANDA-NEWS. Fitch Ratings has affirmed Gatwick Funding Limited's (Gatwick Funding) senior secured notes at 'BBB+', with a Stable Outlook.

The affirmation reflects the very solid operating performance of Gatwick Airport (LGW) over the past year, as well as Gatwick Airport Limited's (GAL, or the borrower) slightly improving debt metric profile.

KEY RATING DRIVERS

Volume Risk - Midrange
LGW is the second-largest airport in the UK exposed to mid-level volume risk with respect to economic cycles, as evidenced by its 11.6% traffic volume fall during the 2008-2010 recession (on a rolling four-quarter basis). It benefits from a strong catchment area for which it serves largely as an origin-and-destination (O&D) airport. However, it is mainly serving a traditionally more volatile clientele of outgoing leisure passengers (albeit with an increasing proportion of business travellers), and operates in competition with Heathrow (LHR), the region's primary hub/long-haul full service/business airport as well as Stansted airport (STN).

LGW's recent traffic performance has been strong, rising by 6.9% (based on number of passengers) as of September 2014 (vs. 3.1% in 2013). This was driven by a combination of more air transport movements (ATMs), larger aircrafts - with an average of four seats more per ATM - and increased load factors (now 86.1% vs. 85.6% last year). Capacity has been close to full utilisation at peak times (95% in August 2014, busiest month ever at LGW) and has been on average 78% (vs. 74% last year). The largest carrier, easyJet plc, now represents 42% of traffic, still considered a comparatively moderate concentration which, however, has grown from 35% four years ago.

Price Risk - Midrange
Since April 2014, GAL has been operating under revised economic regulation. The CAA determined that GAL has "substantial market power" and hence will continue to require some form of regulation, including a CAA licence. GAL has implemented a "contracts and commitments" framework, which establishes seven-year, legally binding contractual undertakings between GAL and its airlines, creating a default airport tariff (covering price and service levels) available to all airlines. Furthermore, GAL has entered bespoke bilateral contracts with the majority of airlines. As part of the overall regulatory structure for Gatwick, the CAA has also set out a process for monitoring GAL's performance under the commitments. This regime will include monitoring the blended price charged under the bilateral contracts to identify whether it is consistent with the CAA's view of a "fair price".

The CAA calculated a fair price benchmark of RPI minus 1.6% per year vs. GAL's blended price (under the commitments framework) of RPI+0% per year (over seven years). Pricing may be above or below RPI minus 1.6% in a given year based on the price path GAL takes and traffic performance compared with the CAA's forecast but performance over seven years in aggregate will be reviewed by the CAA against the fair price benchmark. Annual monitoring by the CAA will take into account material reasons for price variance, for example traffic, the level of capex, etc. The CAA will undertake a review of the contracts and commitments framework in 2H16 to identify whether it is operating in passengers' interests.

Fitch considers that the changes to the regulatory framework do not materially impact the credit quality of the rated notes at this point. However, Fitch will closely monitor further regulatory developments at GAL and the eventual price path at the airport over the next few years.

Infrastructure Development and Renewal - Stronger
GAL has considerable experience in managing its own asset base and has performed significant works over recent years in maintaining and improving its infrastructure. Short and medium-term maintenance needs are well-defined.

Debt Structure - Midrange
GAL's debt-raising programme benefits from a generally strong security and covenant package, but is constrained by GAL's reliance on bullet debt, which bears refinancing risk (although near-term risk is low and GAL has a fairly even spread of bond maturities), and the inclusion of a moderately complex swap portfolio. Financial indebtedness increased over the last 12 months due to a bond issue in March 2014 (mainly to refinance existing term, capex and revolving facilities), with some further drawings expected under the new revolving credit facility in 2H14. However, improved EBITDA led to a slight reduction in net leverage.

Financial Metrics
Given the bullet maturity of GAL's debt, Fitch assesses a synthetic 25-year annuity DSCR as well as leverage (net debt/EBITDA). Fitch's rating case results in a DSCR of 1.5x (average over the seven-year contract and commitment period) and 1.3x (minimum). Fitch's leverage is 5.8x (average) and 6.4x (maximum). We assumed an average price path of RPI minus 1.6% (based on an RPI of 2%) and a passenger compound annual growth rate of 0.9%.

Peer Group
Closest peers are LHR and Manchester Airport Group (MAG, with STN contributing more than 40% to MAG's passenger numbers). LHR's senior secured class A bonds are rated 'A-' and MAG's senior secured debt is rated 'BBB+'. Despite a higher financial leverage LHR is rated one notch above GAL's senior secured debt given LHRs stronger revenue risk assessment and more resilient operating performance, which was demonstrated by fairly small traffic declines during 2008-2010 (down 4.4%) and generally less traffic volatility than at other airports due to its hub status and its constrained capacity.

MAG has seen historically more severe traffic declines than at LGW, of around 20% for Manchester Airport and STN during the financial crisis. However, under new management the vulnerability due to leisure traffic is mitigated by long-term take-or-pay contracts. Furthermore, MAG's leverage profile is well below that of GAL. Hence, overall the credit risk is deemed similar to GAL.

RATING SENSITIVITIES

Negative - Weak financial performance as a result of lower passenger volumes, increased costs or adverse regulatory rulings affecting GAL (e.g. in respect to permissible aeronautical charges) leading to sustained Fitch-calculated leverage above 6.5x, could result in a negative rating action. A change to LGW's competitive position, as signalled, for example, by a substantial withdrawal of services by one of its main airlines or significantly increased counterparty risk, could also lead to a negative rating action.

Positive - A positive rating action is unlikely in the short term in light of GAL's objective not to materially reduce financial leverage from current levels. However, a resilient underlying traffic performance over a number of years, especially demonstrated during an economic slowdown, in conjunction with a prudent financing strategy, leading to sustained Fitch-calculated leverage below 4.5x could result in positive rating action

TRANSACTION SUMMARY

LGW is the UK's second-largest airport by passenger volume, carrying 37.5 million people in the year to September 2014. It primarily acts as an O&D airport serving London and southeast England, with 53% of traffic being leisure-based. Gatwick Funding is a special purpose vehicle set up specifically to issue bonds on behalf of GAL, the owner of LGW. All funds raised by Gatwick Funding are on-lent to GAL in the form of issuer-borrower loans, with the issuer benefiting from a comprehensive covenant package and pari passu share in borrower security along with other senior creditors.