OREANDA-NEWS. Fitch Ratings has placed Airports Company South Africa's local currency Issuer Default Rating (IDR) of 'BBB', National Long-term rating and domestic medium term note programme (DMTN) of 'AA-(zaf)' and National Short-term Rating of 'F1+(zaf)' on Rating Watch Negative (RWN).

The RWN reflects the significant uncertainty on price regulation, as also reflected in the change in the Price Risk rating driver assessment to 'weaker' from 'midrange'. The regulatory committee (RC) in charge of external oversight and recommendations regarding ACSA's pricing regime came out with a significant negative interim decision in May 2015, effectively resulting in a recommended price reduction of around 42% for the year ending March 2016. The final decision has still not been issued. Fitch expects any changes to the pricing regime to be implemented only in the next financial year (FY ending 31 March 2017).

KEY RATING DRIVERS
Volume Risk - Midrange
ACSA is a nationwide airport system and benefits from a virtual monopoly in South Africa, with a diversified range of airports, clienteles and traffic types. However, ACSA's airports are prone to volatile economic developments, as observed with airline bankruptcies in 2012, and a related drop in domestic traffic (-4.6% departing domestic pax year-on-year between 2012 and 2013). The peak-to-trough traffic decline between 2008 and 2010 was 9.8%. FY15 volume grew by 2.4%, slightly ahead of Fitch's rating case expectations.

Price Risk - Weaker
The relatively unfavourable framework of economic regulation, where aeronautical charges only apply to investments when they become operational, has led to a large debt burden in the past. Additionally, recent unfavourable RC recommendations and the surrounding uncertainty regarding final pricing outcomes drive the change in this risk factor assessment to 'weaker' from 'midrange'.

Infrastructure Development / Renewal - Stronger
ACSA engaged in an expansion of its airport system in 2008-2010 due to the traffic growth prospects and the organisation of the FIFA World Cup in 2010. About ZAR17bn was invested between 2005 and 2010. The assets are thus relatively new, with a high economic life. Capacity expansion plans are flexible and can be reduced or increased depending on passenger growth, evidenced by underspending during 2011-2014. ACSA's ability to postpone or reduce capex spending in response to potential price and EBITDA reductions could drive future rating action.

Debt Structure - Midrange
ACSA issues unsecured debt, in the form of listed domestic bonds, bank debt and loans from development finance institutions. Although there is limited structural protection for creditors, the conservative debt management with good access to local capital markets and well-spread debt maturities suggest a 'Midrange' risk attribute.

Financial Metrics
The large capex effort sustained until 2010 combined with the recession in 2008-2009 and the adverse features of the regulatory system led to high leverage (over 6x) in 2009-2011. Since then, operational assets have been yielding revenues through higher tariffs and commercial revenues (retail and parking) and some debt was repaid ahead of maturity in 2014.

Consequently, leverage has dropped more quickly than we anticipated. In FY15, gross and net debt/EBITDA were 2.1x vs (Fitch Rating Case (FRC) expectation of 2.5x) and 1.9x (FRC: 2.3x). FY15 revenue was ZAR7.76bn, in line with the base case and ahead of the FRC. FY15 EBITDA was 5.27bn (FRC: ZAR4.67bn) and capex was ZAR826m (FRC: ZAR 1.35bn).

However, Fitch expects leverage to increase significantly over 2016-2020 due to a combination of price and EBITDA reductions and capex spending. If ACSA continues to demonstrate flexibility with respect to capex timing and amount, it may be able to limit the expected increase in leverage.

RATING SENSITIVITIES
ACSA's metrics are very sensitive to traffic, price changes and capex. The anticipated price changes are expected to significantly reduce EBITDA and therefore increase leverage over 2015-2020.

If the final decision of the regulator implements the recommended price changes, leading to ACSA's net debt/ EBITDA close to or above 5x under FRC, the ratings could be downgraded by around one notch, providing that ACSA is able to drastically reduce planned capex. If ACSA is unable to postpone previously planned growth capex the ratings could be downgraded by several notches.

Resolution of the RWN
The next financial year begins on 1 April 2016, by which time a new pricing regime should be in place. Therefore, we expect some resolution including a final RC decision and additional information on how management will react to the final determination. Once Fitch receives the updated information including information on planned capex given in the context of the final pricing decisions, we may resolve the RWN.