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 12 months to September 2015 5.8% growth in passenger numbers to 39.7 million and Gatwick Airport's (LGW) solid operating performance over the past year. We perceive Gatwick Airport Limited's (GAL, or the borrower) debt metric profile as resilient based on our projected five year average net debt / EBITDA of 5.9x, which is well within the sensitivities of 6.5x for negative rating action and 5.5x for positive rating action. We consider GAL's credit profile to be aligned with that of Manchester Airport Group (MAG). Although less leveraged at a projected five-year average net debt/EBITDA of 3.9x. MAG suffered a higher pax peak-to-trough decline during the last downturn, of 21%. Conversely, Heathrow Funding Ltd's "stronger" volume attribute offsets projected five-year average net debt / EBITDA of 6.5x for the class A bonds. Heathrow only suffered a 4.4% peak-to-trough passenger decline during the crisis.

KEY RATING DRIVERS
Volume Risk - Midrange
LGW is the second-largest airport in the UK. It is 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 remained strong, rising by 5.8% based on number of passengers as of September 2015 vs. 6.9% in 2014. Passenger growth has been supported by a successive introduction of larger aircraft, improving load factors and an increasing number of movements backed by healthy passenger demand. Discounts to airlines also incentivised passenger growth. Capacity has been close to full utilisation at peak times at 95% in August 2015 the busiest month ever at LGW, and averaged 78%. The largest carrier, easyJet plc, now represents 42.6% of traffic. This is still considered a comparatively moderate concentration despite growing from 35.0% five 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 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 commitments 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. 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. However, we 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. Gross financial indebtedness marginally increased over the last 12 months due to expected drawings under the revolving facility. However, improved EBITDA led to an overall 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 1.6x (average over the five years) and 1.3x (minimum). Fitch's leverage is 5.9x (average) and 6.2x (maximum). We assumed an average price path of RPI minus 1.6% (based on a long-term RPI of 2.5%), a passenger compound annual growth rate of 0.5% from March 2016 in addition to fewer efficiency savings and higher cost of new debt.

Peer Group
GAL's closest peers are LHR and 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 higher financial leverage, LHR is rated one notch above GAL's senior secured debt given its 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 21% 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, the overall 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. with respect to permissible aeronautical charges) leading to sustained Fitch-calculated leverage above 6.5x, could result in 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 negative rating action.

Positive - 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 5.5x could result in positive rating action.

SUMMARY OF CREDIT
LGW is the UK's second-largest airport by passenger volume, carrying 39.7 million people in the year to September 2015. 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.