Fitch Ratings has upgraded the long-term rating assigned to Lima Airport Partners S.R.L USD 164 million senior notes due in 2022 to 'BBB+' from 'BBB'. The Rating Outlook is Stable.
The upgrade reflects continued growth in the airport resulting in high financial coverage ratios and low leverage, as well as the strategic importance of the asset as an international gateway with strong regional demand. Necessary expansion measures under the concession agreement will require increased debt in the medium term. Still, considering conservative investment cost and borrowing assumptions, leverage levels are consistent with the 'BBB+' rating.
KEY RATING DRIVERS
Key International Gateway with Robust Traffic Base: Located in Lima, the Jorge Chavez International Airport (JCIA) serves as the main gateway to the country, serving nearly 90% of the total air traffic of one of the largest metropolitan areas in Latin America. The enplanement base of approximately 7.3 million has grown at an average annual pace of 11% since 2007. The airport is primarily an origin and destination (O&D) facility with only 8% of passenger traffic related to transits/transfers. LATAM Airlines Group S.A. (LATAM, rated 'BB'; Outlook Negative by Fitch) constitutes over half of the total traffic at JCIA. However, counterparty risk is partially mitigated by the high O&D concentration of the airport. (Revenue Risk: Volume - Stronger)
Transparent Rate Adjustment Mechanism: The project's concession agreement includes a predetermined formula to adjust rates annually, which allows for cost recovery on a timely basis. The most recent regulated tariff caps covering a five-year period began in 2014. Rates at the airport are competitive in the region, and provide for an adequate revenue generation to meet improvement requirements and financial obligations. (Revenue Risk: Price - Midrange)
Conservative Debt Structure: LAP's notes are senior obligations of LAP, issued with a fixed coupon rate and follow a quarterly amortizing schedule. With a nine-year tail, the notes have minimal refinancing risk. Other structural protections include nine months of debt service covered through insurance policies and sound distribution tests of a 1.25x debt service coverage ratio (DSCR) 12-month backward looking and minimum for every remaining quarter. (Debt Structure - Stronger)
Capital Investment Program Requires Additional Funding: The airport will require a significant investment program to execute the construction of a second runway, as established in the concession agreement and to expand the airport to meet future demand. While final cost figures and funding sources will be determined at a later date, Fitch views current estimates to be financially feasible. Current planned maintenance and budget are considered suitable to sustain the facilities. (Infrastructure Development/Renewal - Midrange)
Strong Financial Metrics: LAP's current debt burden is low when compared to its revenue profile. DSC is high averaging 2.42x with limited dependence on traffic growth to maintain similar performance. Additional leverage considered in the Fitch base and rating case scenarios has a moderate effect on financial flexibility, peaking at 4.4x and 5.0x in 2022 in these scenarios, respectively. Sound margins position LAP in a favorable situation to overcome external adverse events.
Peers: LAP compares favorably with Latin American peers such as the Tocumen International Airport in Panama, rated 'BBB'; Outlook Negative. Tocumen Airport is also an international gateway; however, the O&D concentration is significantly lower at 53% and leverage and coverage metrics are also weaker at 6.7x net debt-to-EBITDA and 1.7x DSCR.
RATING SENSITIVITIES
--Additional leverage: Debt financing of the capital investment program materially reducing financial flexibility beyond expectations could result in a downgrade of the notes;
--Revenue Growth: Sustained and material deviation from traffic growth expectations could positively or negatively affect the rating.
CREDIT UPDATE
The airport continues to benefit from its strategic location and infrastructure facilities resulting in higher domestic, international, and cargo levels. Historical traffic stability is underpinned by an adequate mix of leisure and business travelers and a growing domestic middle class.
The enplanement base for the airport is expected to reach approximately 7.3 million in 2014. Domestic traffic represents over 50% of total air traffic at JCIA, highlighting greater consumer demand for air transport over other modes in Peru. Some slowdown in the traffic growth is evident, as enplanements grew by 4.9% in 2014 as compared to 11.9% in the prior year. Fitch views annual growth in the 3%-4% range over the next several years as conservative assumptions. JCIA has a significant carrier concentration with LATAM having the largest presence via their LAN and TAM airline brands.
Additional debt is projected to be issued to fund the capital expenditures (capex) program which includes the construction of a new terminal and a second runway. Fitch expects increased debt financing associated with these investments to increase leverage at levels commensurate with the assigned rating.
Construction of the runway is expected to begin in 2016 upon the successful transfer of land by the government. This is expected to occur at the end of 2015 after the construction of the Nestor Gambetta tunnel which traverses the land. As established by the Concession Agreement, LAP will have five years to complete the construction of the second runway, after 100% of the land for the runway is received. Fitch considers the additional leverage in the agency's projections and cash flow analysis.
Design of the new terminal commenced in 2014 and is expected to be completed in mid-2015. Construction of the new terminal is expected to be carried out in phases in order to allow flexibility of timing so that capacity demands are met as reached.
Fraport's global expertise continues to maintain the airport in optimal conditions, allowing for more efficient services and keeping operating expenses relatively stable. During the first 11 months of 2014, total operating expenses (opex) increased approximately 3% with respect to the same period in 2013, maintaining an adequate cost profile.
Tariffs remained relatively constant and include the revised adjustment metric (x-factor) established by Organismo Supervisor de la Inversion en Infraestructura de Transporte de Uso Publico (OSITRAN) for the 2014-2018 period of 0.05%.
The JCIA Concession was granted by the Ministry of Transportation, Communications, Housing and Construction (MTC) of the Peruvian Government and expires in 2031, nine years after the maturity of the rated notes. LAP has an automatic right to extend the concession term for an additional 10 years upon delivery of written notice to the MTC. The concession renewal would support the credit to the extent LAP moves forward with additional borrowings for the terminal and runway projects.
SECURITY
The notes are secured by all revenues at JCIA collected in connection with the services and facilities furnished by LAP, all assets including all the issuer's rights under the Concession Agreement pursuant to the Trust Agreement.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Rating Criteria for Infrastructure and Project Finance', July 12, 2012;
--'Rating Criteria for Airports', Dec. 13, 2013.
Applicable Criteria and Related Research:
Rating Criteria for Infrastructure and Project Finance
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=682867
Rating Criteria for Airports
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=725296
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=965855
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