Fitch Revises Domodedovo Airport's Outlook to Negative; Affirms at 'BB+'
October 8, 2015
Fitch Ratings has revised the Outlook on DME Limited's Long-term Issuer Default Rating (IDR) and the USD300m senior unsecured notes issued by DME Airport Limited to Negative from Stable. The ratings have been affirmed at 'BB+'.
The rating actions follow the announcement on 28 September that all Transaero flights currently operating from Domodedovo airport (DME) will be transferred to Vnukovo airport from 25 October 2015. They also reflect the recent news that Transaero's proposed acquisition by Aeroflot is not going ahead and the airline may instead undergo bankruptcy proceedings. The Negative Outlook reflects our view that the loss of Transaero's traffic will directly affect DME's performance and put additional pressures on the airport in the currently weak economic environment.
KEY RATING DRIVERS
Transaero passengers account for about 15% of traffic at DME. Fitch now expects 2015 passenger traffic to decline by 9% (compared with 6% under our previous rating case) and by 12% in 2016 (0% in previous rating case), reflecting the loss of Transaero traffic. Some of Transaero's traffic may be picked up or compensated by other airlines operating in DME. The company's management expects that the number of flights for the winter season 2015/2016 will be very close to last year's, according to verified slots scheduled by other airlines including Aeroflot subsidiaries (Rossiya, Don-Avia, Orenburg Airlines). However, in Fitch's view, the extent of this replacement and whether the planned slots will convert into passenger traffic is currently uncertain.
The affirmation of the 'BB+' ratings reflects that leverage remains fairly low and financial performance is reasonably sound. Based on consolidated 1H15 results, revenues in rouble terms declined by 3% while traffic declined by 7.8%. As DME generates 46% of revenues in EUR/USD, Fitch expected a positive impact on rouble revenues as a result of devaluation, all else being equal. The fact that rouble revenues actually declined signifies weaker operational performance. However, DME implemented some cost-cutting measures and EBITDA grew by 3% to RUB7.2bn in 1H15. The company also benefits from substantial liquidity as indicated by its high cash position as of June 2015.
Total debt/EBITDA was 1.6x at end-2014 based on Fitch's calculation, which includes payment obligations under the concession) and Fitch expects that gross leverage will increase to 2.4x in 2015 under our rating case. The increase in expected 2015 leverage is due to further depreciation of the rouble (Fitch now assumes an exchange rate of 70 RUB/USD vs RUB 60/USD previously), additional debt taken by DME in September 2015 (EUR38m to finance the development of parking facilities), and Fitch's conservative estimate of 2015 EBITDA. Under our rating case, gross leverage would peak at 3.8x in 2016 assuming additional debt to finance DME's investment programme. This would still be considered commensurate with the current ratings. However, the company plans to utilise internal liquidity without raising additional debt in 2016 and gross leverage would be below 3x in 2016 without raising additional debt under the rating case.
Rating upside potential is limited.
The ratings could be downgraded if there is a consistent deviation in financial performance from Fitch's rating case. The ratings may also come under pressure in case of significant decline of the share of revenues collected in USD/EUR, further significant loss of traffic or further prolonged devaluation of the rouble.
The Outlook may be stabilised if, absent other negative developments, passengers volume displays resiliency beyond the loss of Transaero traffic
SUMMARY OF CREDIT
DME Ltd is a group of companies that operates Domodedovo airport - one of the three airports in Moscow. The group owns the terminal buildings and leases the runways and other airfield assets from the Russian government. Senior unsecured notes of USD300m were issued in 2013 by DME Airport Limited - a special purpose vehicle registered in Ireland that on-lent the proceeds to Hacienda Investments Ltd, a subsidiary of DME Ltd.
Company — Airport Management Company Limited
Full nameAirport Management Company Limited