S&P: Ratings On Airport Authority Hong Kong Affirmed At 'AAA' On Continued Government Support; Outlook Remains Negative
"We affirmed the rating because we continue to expect an almost certain likelihood of AAHK receiving extraordinary support from the Hong Kong government should it face distress," said S&P Global Ratings credit analyst Joseph Lin.
We believe the government's commitment and willingness to support AAHK remain unchanged because the company undertakes an important public policy role for the Hong Kong Special Administrative Region (HKSAR: AAA/Negative/A-1+; cnAAA/cnA-1+).
We are also maintaining our assessment of AAHK's stand-alone credit profile (SACP) at 'aa-'. Previously, uncertainty regarding the company's likely increasing leverage to fund the Three Runway System (3RS) project affected the SACP by two notches, despite the company's very low level of debt. However, over recent months, the company has developed a funding plan, providing greater clarity regarding the increased debt that AAHK is likely to raise over the next two to three years. In particular, we now expect the ratio of funds from operations (FFO) to debt to gradually move into the 23%-35% range, commensurate with a modest financial risk profile. The SACP further incorporates our view of the execution risks that could stem from a mega project such as 3RS, both from an operational and financial perspective.
We view the airport construction fee (ACF), which AAHK implemented in August 2016, as a good and consistent source of funding, in addition to typical project-level debt financing. We expect the company's ACF, retained dividends over the past two financial years, and operational surplus to offset the capital needs in the very initial stage of 3RS. In addition, these sources provide the company enough financial flexibility to fund its 3RS-related expenses and its operating capital over the financial years ending March 31, 2017, (fiscal 2017) and 2018.
In fiscal 2019, we expect a sharp rise in financial leverage to about 1.5x from a net cash position. Furthermore, we forecast AAHK's FFO-to-debt ratio to be 50%-55%, from over 130% in fiscal 2018. In our view, these relatively strong leverage metrics do not fully capture the medium-term financial risks that the company is exposed to. In particular, AAHK's free operating cash flows are likely to remain materially negative starting in fiscal 2018, eventually increasing its debt level once the company depletes its retained cash. Nevertheless, we view the company's funding strategy as supportive of its credit quality, given that its leverage would be much lower than peers' toward the end of the project.
Underpinning AAHK's key business strength is its monopolistic market position in the Hong Kong airport segment, and its position as one of the top-five airports in the world.
"We expect AAHK will carefully manage its capacity constraint through various means before timely completion of the 3RS project," said Mr. Lin. "In addition to the long-term capacity expansion project, the company is also enhancing its existing facilities."
Nevertheless, we view the company would have less flexibility and reduced means to manage an unexpected and significant cost structure changes or cost overruns.
We expect AAHK's revenue to grow moderately due to passenger growth, increase in airport fees and charges, retail and airside services growth, and ACF implementation. We expect the company's profitability will remain stable over the next 12-24 months. In addition, we forecast its EBITDA margin to be higher, in the range of 71.5%-73.5%, after including the ACF.
The negative outlook on AAHK reflects the rating outlook on HKSAR over the next 24 months. The ratings on both entities will move in tandem.
We continue to expect an almost certain likelihood of extraordinary support from the government should AAHK face financial distress.
We would downgrade AAHK if we lower the rating on HKSAR. We may also lower the rating on the company if we believe the Hong Kong government's commitment to providing support to AAHK has weakened. While we believe such a scenario is unlikely, weakened management control or a significant reduction in the government's ownership would indicate weaker government commitment.
We would revise the outlook to stable following the same rating action on HKSAR.