S&P: Mexico City Airport Trust's US$2 Billion Senior Secured Debt Assigned 'BBB+' Ratings; Outlook Negative
"The 'BBB+' rating and negative outlook on the trust's senior secured debt primarily reflect the credit quality of the sponsor of this transaction, Grupo Aeroportuario de la Ciudad de Mexico S. A. de CV (GACM)," said S&P Global Ratings credit analyst Thomas Jacquot.
This rating dependence on GACM is because we consider the continued operation of the Mexico City airport is critical to generating airport passenger revenue (Tarifa de Uso de Aeropuertos, or TUA) that will support debt repayment.
GACM is a government-related entity wholly owned by the Mexican government, and the concession holder of new airport NAICM. GACM also owns Aeropuerto Internacional de la Ciudad de Mexico, S. A. de C. V. (AICM), the concession holder of the existing airport.
A key characteristic of this transaction is that the bulk of the airport's revenue will come from the TUA. This gross revenue will be available to the trust to service its debt obligations ahead of other costs. In the event of depressed traffic, available cash after debt service could be trapped at the trust level, leaving GACM to relying solely on non-TUA revenue to cover the airport's operating costs. Currently, the TUA represents about 60% of the airport's total revenue and is likely to increase to about 70% upon completion of the new airport.
The seniority of debt service payments provides credit support for secured creditors. However, we believe that the structure is highly reliant on GACM for a number of reasons. In particular, GACM, through AICM, holds the concession to operate the existing airport—a default under the concession could put future TUA at risk. Continued cash flows to the trust from the TUA are also reliant on the continued operation of the airport, which is ultimately GACM's responsibility. As a result, we believe GACM's credit quality will largely constrain the rating on the debt.
Despite the close correlation of the debt ratings with GACM's credit quality, the sponsor's creditworthiness might not necessarily be a cap. This is because we consider the Mexican government is very highly likely to provide extraordinary support should the trust face financial distress.
Although the trust is a special purpose vehicle with recourse limited to the TUA receivables, we don't believe that the primary driver of the structure was to limit GACM's and ultimately the government's liabilities. In fact, we view the trust as akin to being the financing vehicle of GACM and that the trust structure provides additional comfort to secured creditors compared to a simpler, corporate, senior-unsecured financing that GACM could have arranged.
We consider the trust to be a government-related entity for two reasons. First, under the concession agreement, GACM and AICM cannot pledge any of the airport assets to support a financing. The TUA receivables, though, are one of the few assets that it can pledge. Second, unlike typical project finance structures, this transaction does not seek to transfer construction or operation risks to a private sector entity.
We factor in the likelihood of extraordinary government support in the rating analysis. Our assessment of the very high likelihood of support reflects the following factors:The airport's very important role because of the economic and political importance of existing and future airports to the government. In our view, the airport provides an essential service to the population of Mexico—especially to Mexico City—as the main gateway to the country's capital; andThe airport's very strong link to the government because we consider that the airports are in charge of managing and expanding one of the major infrastructure assets of the country in strict accordance with the government's plans. The link also benefits from the government's permanent involvement in the airport's supervision, management, and strategic decisions, including its strong influence on its board of directors. Furthermore, the link reflects the government's consistent record of support to the company through annual financial contributions to largely finance the new airport's construction. Another differentiating factor in this transaction relates to the construction of the new airport and the fact that a significant number of construction tasks are still at an early stage of procurement. The overall construction phase, in our view, bears limited similarities with traditional project finance transactions with construction risks, which are usually characterized by fixed price construction contracts for the entire construction phase and full funding available at inception. This is because completion of the asset is generally critical to repayment of the debt. For this transaction however, we have only focused on existing cash flows from the existing airport. Our analysis indicates that those cash flows are sufficient to repay the debt.
Given these unique characteristics of the transaction, we rate it based on our "Principles Of Credit Ratings" methodology. In particular:We have not assessed the construction phase of the new airport. Typical project finance transaction ratings with construction risk will reflect the combined risk of the project across both the construction and operation phases. The construction assessment is necessary as it determines the risk that the asset may not be constructed, and therefore, the project may not generate cash flows to the level we expect. In this transaction, we rely solely on the cash flows from the existing airport and do not include in our forecast any uplift related to passenger growth that the new facilities would be able to handle. We have assessed the cash flow coverage according to the contractual cash waterfall at the trust level. In typical project finance transactions, we consider an asset's operating costs incurred in its operations and maintenance would have priority over senior debt-servicing costs. This is because continued operations at the airport are necessary to ensure that it generates cash. In this transaction, residual cash flow after debt service at the trust level will partly cover operating costs. Other airport revenues, such as from commercial activities, will supplement payment of operating costs. We believe that notionally amending the trust's cash flow waterfall by adding operating costs would not capture the overall project's ability to cover these costs, given that the trust does not capture all revenues. Instead, in order to recognize the importance of continued operations for ongoing cash flows, we consider that GACM, the operator of the airport and wholly owned by the Mexican government, will be an irreplaceable counterparty. Therefore, the credit quality of GACM will cap the stand-alone credit profile of the trust. The negative outlook primarily reflects the outlook on the credit quality of GACM, which is itself reflective of the negative outlook on the foreign currency sovereign rating of Mexico. From an operational perspective, we expect the airport's passenger traffic to grow moderately over the next two years.
The outlook also incorporates our expectation that the project would issue about US$6 billion over the next two-to-three years, including the initial issuance of US$2 billion, at rates consistent with similarly-rated peers. As a result, we consider that the debt-service coverage ratio would remain above 1.3x until the target completion date of the new airport.
"Constraining the rating is our assessment of GACM's credit quality, which itself is limited by the foreign currency rating on Mexico," said Mr. Jacquot. "As a result, an outlook revision to stable would occur upon a similar action on the sovereign rating outlook."
The direct linkage with the sovereign outlook is also due to our expectation that GACM or the government would cover any increased funding required for the new airport over and above budgeted amounts.
Given the linkage between the project rating and GACM's credit quality, the rating on the senior debt would be at risk if GACM's creditworthiness were to deteriorate. This could occur if our view of government support for GACM in the event of financial stress were to weaken.
Any severe underperformance of passenger traffic or material debt cost increase (due to debt levels above our expectation or significant increase in debt margin) could also put the rating at risk. In particular, downward rating pressure could occur if we were to expect that the cash flow coverage would not remain broadly above 1.10x based on cash flows from the existing airport only. Such a scenario would also likely affect GACM's credit quality, given that we include the project's debt in our assessment of GACM.