OREANDA-NEWS. June 04, 2015. Fitch Ratings has assigned Aena, S.A. a Long-term Issuer Default Rating (IDR) of 'BBB+' with Stable Outlook.

Aena is a listed company registered in Spain that owns and operates 46 airports (including six military air bases) and two heliports in Spain. Internationally, the company holds participations in Luton airport in the UK (holdings increased to 51% in 2014), 12 airports in Mexico and two in Colombia (all minority holdings).

KEY RATING DRIVERS
The rating is supported by Aena's strong market position as the sole owner/operator of airports in Spain, its large O&D market with close to 70% of international passengers (pax), its strong recent financial performance (adjusted EBITDA excluding international operations grew at a CAGR of 28.8% between 2011 and 2014 to EUR1,853.7m), well invested airports, and the amortising debt structure with solid debt metrics. However, the regulatory framework has been subject to a number of changes and aeronautical charges are currently capped at 0% until 2025. The rating is also constrained by Aena's lack of trading history since the partial privatisation with operating costs having been cut significantly within a relatively short period of time (20.9% between 2011 and 2014). Furthermore, Aena is involved in a number of legal proceedings, most notably in respect to previous land expropriations at Madrid airport.

Revenue Risk: Volume - Midrange
Aena is the largest airport operator in the world by number of passenger, with 196m pax during 2014 and 187.4m passengers in 2013. It is predominantly an O&D network of airports (83% of pax) serving, to a large extent, leisure traffic (mostly from Europe) while domestic traffic only accounts for about 31%. With Barcelona and Madrid, the network includes two hub airports, connecting Spain to a variety of international destinations, most notably with Latin American and European routes. Aena's carrier profile is reasonably well spread among low cost carriers (49%, LCCs) and traditional full service carriers (51%) with no single airline group accounting for more than 25% of pax.

Traffic performance was strong in 2014 rising by 4.5% and about 6% year-on-year in 1Q15, but this follows years of volatile traffic performance as a result of Spain's and Europe's difficult economic environment in 2009 as well 2012-13 (particularly in Spain). Total traffic is still 7% below the peak reached in 2007 of 210.5m pax. However, Fitch views positively that around 70% of the traffic originates outside of Spain, mainly from economically stronger parts of northern Europe (e.g. UK, Germany). The main contributor of historical traffic volatility has been declines in domestic passenger numbers (which were also impacted by the rollout of new high-speed train routes in Spain).

Revenue Risk: Price - Midrange
The regulatory framework features a progressive 'dual till' system, moving to full 'dual till' by 2018, and includes the concept of a regulatory asset base (RAB). There has been some lack of clarity in the way regulation is enacted and enforced and this uncertainty is expected to continue until 2017, when the first document of airport regulation (DORA) comes into force for the 2017-2021 regulatory period. Aena is currently negotiating with airlines and other stakeholders proposing a business plan which will then be presented to the primary regulator, the Ministry of Transport, Directorate of Aviation. The Council of Ministers then sets prices taking this proposal into account. However, increases in charges are capped by law at 0% throughout the transition and first two DORA periods.

Fitch expects that regulated aeronautical charges will decline in 2016 as a result of a variety of factors including a solid traffic performance under Fitch's base case and ensuing subsidies from the commercial activities in addition to a declining RAB. Moderate tariffs, compared with European peers, may support future volumes to some extent, given the more price sensitive customer base. However, Fitch understands that cost recovery under the tariff system is limited i.e. any accumulated deficit during the first and second DORA may not be recoverable through the fees and rates Aena can charge after the end of a five-year regulatory period. As Aena is moving towards 'dual till', the commercial strategy implemented over the last years is expected to benefit the company's income.

The Spanish state is Aena's largest (indirect) shareholder (with a 51% stake held via Enaire) and Aena is considered as an entity with assets of "general interest" for Spain (a strategic company), so it may be subject to level of influence from the government. The tariff system has been changed regularly in the past, with more generous tariffs approved by the government in 2012 and 2013 but subsequently changed in 2014 when the tariff freeze was decided. Fitch also notes that there is currently a dispute between Aena and its supervisory body (CNMC) in 2015 regarding the cost allocation between those activities that are included in the RAB and those that are not.

Infrastructure Development and Renewal - Stronger
Aena recently completed a significant capacity expansion and facilities upgrade programme, having spent around EUR10.8bn between 2005 and 2014 (i.e. over EUR1bn in average per annum). Its facilities are thus very well maintained with comparatively low capex requirements (capped at EUR450m annually by regulation). There are no foreseeable capacity constraints during the tariff freeze periods.

Aena is currently party to three significant legal proceedings relating to expropriations carried out in connection with the Madrid airport expansion. Aena has provisioned for liabilities of EUR920m including accrued interest due to potential property price adjustments. Aena's management contends that if a negative outcome is reached and payments have to be made, the difference in land value would be added to the RAB and adjusted through capex.

Debt Structure - Midrange
The senior unsecured debt benefits from a covenant package based on leverage (net debt to EBITDA) and interest charge cover as well as other protective covenants (asset disposals, negative pledges). The debt is fully amortising, but the heavy amortisation in the early years (around 10% per annum of the debt outstanding) exerts some pressure on cash flow available for debt service (CFADS). However, in Fitch's view, potential temporary cash flow shortfalls should be well covered by available revolving credit facilities (RCFs) or direct debt refinancings. Currently, only a small portion of Aena's debt is fixed rate. Fitch understands that Aena plans to review the current interest rate hedging policy in order to increase the share of fixed rate debt.

Fitch assumed in its rating analysis that RCFs covering at least 12 months of total debt service will be put in place during 2015 and that there will be a change in the hedging policy in the short term.

Debt Service
Over the past few years, Aena's financial leverage (net debt to EBITDA) has reduced materially down to around 5.6x due to reductions in gross debt as well as materially rising EBITDA, which was helped by large reductions in operating costs. Fitch expects that further, albeit less significant, de-leveraging could materialise over the next few years, mainly as result of the amortising nature of Aena's debt.

Under Fitch's rating case (with adjusted EBTIDA excluding international operations growing at a CAGR of 0.6% between 2014 and 2021), Aena's net debt to adjusted EBITDA reduces to 4.0x by end of 2017 and down to 2.9x by 2019 from 5.6x in 2014. However, this assumes that gross debt will be repaid in accordance with the current repayment schedule with no additional borrowings.

The CFADS debt service coverage ratio in the Fitch rating case averages 1.1x but falls slightly below 1.0x in 2015 and 2016 as a result of heavy debt amortisation. However, the shortfall is expected to be easily covered by the cash available on the balance sheet and the RCF with about EUR105m drawn in 2016. Alternatively, some debt could be refinanced as the CFADS interest coverage ratio is very strong, at an average of 4.6x.

Fitch has also run stress scenarios, e.g. assuming a theoretical recessionary environment in 2017-18, which indicates that Aena should be able to maintain its net debt to adjusted EBTIDA leverage at below or around 5.6x.

RATING SENSITIVITIES
An upgrade may be constrained pending further regulatory clarity, resolutions of pending legal proceedings, and a more established track-record with respect to the issuer's financial performance (both in terms of revenues and costs).

Positive rating action could follow once these issues have settled or improved and Fitch projected net debt to adjusted EBITDA is at or below 4.5x on a sustainable basis.

Negative rating action could be warranted if, for instance, there are negative rulings on various court cases (e.g. Madrid land expropriation case, Canary Island dispute) or if management's planned interest rate hedging policy or the RCF target of around EUR1bn is not implemented.

The ratings could also be downgraded if operating performance deteriorates and/or the issuer re-leverages leading Fitch projected net debt to adjusted EBITDA to rise above 6.0x on a sustainable basis.