OREANDA-NEWS. Fitch Ratings has affirmed Manchester Airport Group Funding PLC's (MAG Funding, or the issuer) senior secured notes, as follows:

GBP5bn Multicurrency Note Issuance Programme: 'BBB+'; Outlook Stable
GBP450m 4.75% fixed rate bonds maturing March 2034: 'BBB+'; Outlook Stable
GBP360m 4.125% fixed rate bonds maturing April 2024: 'BBB+'; Outlook Stable

The affirmation primarily reflects robust growth in passenger traffic, which has contributed to strong operating performance over the past year, with EBITDA growth of 17.2% in FY15 (reaching GBP283.6m), in addition to modest expected leverage (Fitch rating case projected five-year average: 3.9x). Weak historical volume resilience is partly mitigated by a relatively conservative business plan and management's recent positive performance track record. Stansted's operating profile, in particular, has been strengthened by medium-term 'take-or-pay' style contracts with Ryanair (BBB+/Stable) and EasyJet. We view this contractual framework as positive and unique within the large scale European airport sector, although Ryanair's 45% contribution to group traffic exposes MAG to counterparty risk.

KEY RATING DRIVERS
The ratings are based on the following factors, among others:

Volume Risk: Midrange
MAG is the second-largest consolidated UK airport operator and is characterised by a high proportion of origin and destination traffic within a large catchment area of around 45 million people. Stansted profits from the attractiveness of London but faces strong competition from Heathrow and Gatwick. Although the group faces some volatility in terms of passenger volumes due to the high proportion of leisure-related traffic, this is mitigated by the largest airline, Ryanair (45% of group traffic), given its strong financials and the long-term contracts, which support future revenues through minimum volume guarantees.

MAG is among the group of European airports that were worst affected by the financial crisis, having undergone a 21% peak-to-trough decline in passenger volumes. However, both Manchester and Stansted airports demonstrated excellent growth in FY15, with growth in passenger numbers of 7% and 16%, respectively. This performance is well ahead of Fitch's rating case assumptions and offers a pick-up of lost volumes. Together with the moderate business plan, this growth supports improved future resilience.

Price Risk: Midrange
Following the deregulation of Stansted in 2014, the airport group now has full price setting flexibility across all airports. However, the group's lack of substantial market power (a key criteria for economic regulation that both MAN and STN fail to achieve) limit the ability to mitigate revenue volatility through tariff increases.

Infrastructure Development/Renewal: Stronger
All of MAG's airports have seen substantial capital investment over recent years. Infrastructure is relatively new and all airports have sufficient spare capacity to accommodate forecast traffic into the 2020s. The group has a well-defined yet flexible modular capital expenditure plan, financed mainly from free cash flow and backed by strong shareholder support.

The ongoing Stansted Transformation project is on time and nearing completion. During 2015, management brought forward some of the capital spending on the Manchester redevelopment, a change which Fitch views as broadly credit neutral. We consider that the capex plan in place is well detailed and that the group has the experience and capability to ensure assets are appropriately maintained.

Debt Structure: Midrange
MAG Funding is a fairly typical secured corporate transaction. Notably, lockup thresholds for distributions offer only weak protection as they are set at levels far below current and expected financial performance. The issuer benefits from senior security (including a 'qualifying' floating charge), a defined hedging policy and dedicated liquidity equivalent to 12 months' debt service. Following additional bond issuance in April 2014, 90% of MAG's debt is now fixed rate.

Fitch's rating case analysis showed that MAG has a fairly conservative leverage profile compared with other similarly rated airports. Given the bullet maturity of MAG's debt and the fact that MAG holds majority freehold (STN and East Midlands Airport) or long leasehold (MAN and Bournemouth Airport) assets, Fitch assesses a synthetic 25-year annuity DSCR as well as leverage (lease-adjusted net debt/EBITDAR). Fitch's rating case results in a DSCR of 2.57x (five-year average) and 2.14x (minimum). Fitch's leverage is 3.90x (five-year average) and 4.27x (maximum).

RATING SENSITIVITIES
Weak financial performance as a result of lower passenger volumes, increased costs or adverse regulatory rulings affecting MAN or STN as characterised by sustained Fitch leverage above 4.5x.

Negative rating action could also be prompted by a significant increase in counterparty risk relating to material contracts (i.e.: disputes or significant deterioration in creditworthiness relating to the airline revenue agreements or other guaranteed contracts).

The ability to deliver the business plan consistently over a number of years and achieve a more resilient operating profile, particularly at STN, could result in positive rating action (as characterised by sustained Fitch-calculated leverage below 3.0x).

SUMMARY OF CREDIT
Manchester Airport Group PLC (MAG) is the UK's second-largest airport group, operating four international airports in England with aggregate passenger throughput of 48.5 million in FYE March 2015. The portfolio primarily comprises Manchester Airport and Stansted Airport, the third and fourth largest airports in the UK, with 22.3 million and 20.9 million passengers in FY15, respectively. It also includes smaller operations at East Midlands Airport (4.6 million passengers) and Bournemouth Airport (0.7 million passengers). Fitch concentrated its credit analysis on MAN and STN because of their operational and financial predominance (together they represented about 89% of passengers and 87% of revenue in FY15).