European Infrastructure Finance Yearbook - Investing In Bonds ...

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TRANSPORTATION INFRASTRUCTURE 54 ■ NOVEMBER 2007 (BIA; A-/Stable/A-2) showed negative 0.5% growth in the first half of 2007: the semi-annual figure suggests traffic is however decreasing less rapidly than in full-year 2006 (2.5%). Second-half 2007 and 2008 will be crucial to confirm whether this decline suggests a departure from BIA’s longterm growth trend. Improved profitability and cash flow generation overall but pressures mounting for some airports We expect most rated European airports’ EBITDA to improve in 2007, on the basis of more traffic, increases in airport charges, higher nonaeronautical revenues, and the implementation of cost-cutting measures. Reported interim accounts at June 30, 2007 by ADP, Brussels, Copenhagen or Schiphol airports support that view; only Aeroporti di Roma SpA (AdR; BBB/Watch Neg/ A-2) is showing a negative evolution. The disposal of ADR Handling and Italy’s 2007 budget law impacted AdR’s reported EBITDA, which was down 2.9% against the first semester of 2006. Without this, EBITDA would have grown by 3.4%. Increased security and utilities costs could hamper EBITDA growth, however, particularly if rising costs are not offset by sufficient traffic and revenue growth or cost control. Brussels Airport reported a strong 14% EBITDA growth in its 2007 interim accounts, illustrating management’s ability to cut operating costs; not all airports have such a track record and pressures could rise in the short to medium term for some of them. In some European regional airports (notably in the U.K.) aeronautical revenue is set to grow more slowly than passenger volume in the future, reflecting price incentives offered to grow traffic levels and the increasing proportion of low-cost traffic. This is due to smaller airports increasingly competing with more established regional hubs, as well as a continuing shift in market segments resulting in a growing reliance on low-cost traffic. Aeronautical yields per passenger have actually started to decline at Manchester Airport Group PLC (MAG; A/Stable/--) and the same could happen at BIA due to the company’s growing exposure to low-cost traffic and aggressive pricing competition. So far, decline in aeronautical income has been offset by the resilience of nonaeronautical income. That might not always be the case, though, and ultimately steady cash flow generation could be at risk. STANDARD & POOR’S EUROPEAN INFRASTRUCTURE FINANCE YEARBOOK Most airports have benefited from increasing revenues and profits from their real estate-related businesses in the past years. Future contributions from that segment could shrink or prove less buoyant than in the past if the business and commercial real estate markets stabilize or decline after several years of sustained growth. We will continue monitoring airports’ strategies in real estate, its stability as a revenue source, and if any property development risks are being taken that we would consider as weakening the airport’s business risk profile. Governance and financial aspects paramount for future ratings stability The rating implications of overall higher profitability and stronger internal cash flow generation will depend on the use shareholders make of additional cash flow: The funding of capital spending or capital structure improvement will be neutral to positive from a credit perspective. Conversely, increasing distribution payout or M&A activity could put some pressure on the ratings. A clear example of that is Brussels Airport. Profitability and cash flow generation have been on the rise following the 2005 privatization, but we lowered the rating to ‘BBB’ from ‘BBB+’ in June 2007, following a significant special distribution of €310 million to shareholders (subject to meeting certain performance hurdles). As the company was operating under a financing structure limiting extraordinary dividends, the shareholders had to make a recapitalization to repay existing debt in order to make their distribution. Looking ahead, it is crucial that airports maintain good credit quality and access to external funding for their capital expenditures and refinancing needs. In this respect, not only do operational and financial performance matter but ownership and governance are also key credit factors. Increasingly complex structures are being put in place in order to extract money from the airport operating companies for distribution and/or refinancing of acquisition debt, due to a spike in investor interest in acquiring airports. Standard & Poor’s rigorously examines ownership arrangements and changes so as to measure the debt obligations that are, directly or indirectly, supported by an airport’s operations. In June
2007, the ‘BBB/A-2’ ratings on AdR were placed on CreditWatch with negative implications. The placement reflected the growing short-term risk to AdR’s credit quality posed by the--ultimately successful--proposal by Gemina SpA (not rated) to buy out Macquarie Airports’ (Map) (BBB/Stable/--) 45% stake in AdR. Now that Gemina indirectly owns a 96% stake we will review the new ownership structure, focusing particularly on the now single, dominating shareholder. We will also evaluate any revisions to AdR’s business and financial strategies. Governance and financial policies are increasingly important considering the releveraging that has taken place in the airport industry over the past few years; in most airports financial flexibility is weak. In addition, some airports need to strengthen their financial profiles or complete a refinancing to maintain current ratings. Regulation will remain a long-term rating driver One key factor to stable credit quality is to recoup short-term operating and long-term capital costs, which speaks to regulation. 2007 has already brought some regulatory changes and more are on the agenda with several regulatory reviews of airport charges in progress. In any event, the way in which the regulators allow airports to fund construction and remunerate their investments will remain an important rating factor. The Competition Commission’s report to the U.K. Civilian Aviation Authority (CAA), published Oct. 3, 2007, proposes price controls at BAA’s primary airport facilities at Heathrow and Gatwick that are not materially different from the CAA’s December 2006 initial proposal. The report itself does not compromise BAA’s ability to execute a proposed corporate securitization refinancing, including the refinancing of BAA’s existing bonds into an investment-grade ringfenced entity. However, the proposed price controls are likely to affect the timetable for doing this, and, if the initial proposals remain unchanged, the overall amount of debt eventually STANDARD & POOR’S EUROPEAN INFRASTRUCTURE FINANCE YEARBOOK TRANSPORTATION INFRASTRUCTURE placed into the ring-fence structure. Firm proposals for the new price controls will not be revealed for the five-year period from April 2008- 2013 until November 2007. On July 30, 2007, the Irish Commission for Aviation Regulation published its final decision on the maximum level of airport charges that may be set at Dublin Airport for 2006-2010. The commission decided not to increase the cap on airport charges at Dublin until 2010. The regulator made it clear that the financial sustainability of the airport (one of the regulator’s three main duties) can be achieved with an IG rating (high ‘BBB’ category), and, therefore, maintaining the current ‘A’ rating is not part of its statutory duty. However, airport passenger charges are likely to rise 22% between 2010 and 2014. The price rise is aimed at helping DAA to pay for Terminal 2 and related projects. As the cost can only be recovered when the terminal is operational, DAA will have to borrow a significant amount to pay for the investment program. Standard & Poor’s will be reviewing DAA’s business plan in the next few weeks to assess the impact of the new debt on the rating. The ratings and outlook on ADP remained unchanged in July 2007 following the decision by the Conseil d’Etat (France’s highest administrative court) to cancel the 2006 tariff increase charged to carriers last year, on the grounds that the company did not supply adequate financial information to the consultative committee. The decision did not call into question the level of tariffs itself or imply repayment by ADP of the corresponding amounts. ADP will have to apply again to the consultative committee to validate last year’s tariff increase, as well as tariffs decided for 2007. Importantly, on April 25, 2007, the court had confirmed the validity of the five-year regulatory contract between ADP and the state, paving the way to implement annual tariff increases of up to 3.25% plus inflation until 2010. On that basis, we expect ministerial confirmation of previously accepted 2006 and 2007 tariff increases in the course of 2007. ■ NOVEMBER 2007 ■ 55
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November 2007 Infrastructure Financ
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CONTENTS Introduction STANDARD & PO
Page 5 and 6: INTRODUCTION 2007: New Challenges A
Page 8 and 9: ject Finance Rating Distribution: I
Page 10 and 11: COMMENTARY Publication Date: Sept.
Page 12 and 13: (Bil. ) 140 120 100 80 60 40 20 0 F
Page 14 and 15: UTILITIES EUROPEAN UTILITIES Once a
Page 16 and 17: UTILITIES approach to ownership unb
Page 18 and 19: UTILITIES 16 ■ NOVEMBER 2007 tran
Page 20 and 21: UTILITIES 18 ■ NOVEMBER 2007 Limi
Page 22 and 23: UTILITIES 20 ■ NOVEMBER 2007 •
Page 24 and 25: Publication Date: osenergoatom (sta
Page 26 and 27: UTILITIES 24 ■ NOVEMBER 2007 Tabl
Page 28 and 29: UTILITIES 26 ■ NOVEMBER 2007 supp
Page 30 and 31: UTILITIES 28 ■ NOVEMBER 2007 pres
Page 32 and 33: UTILITIES 30 ■ NOVEMBER 2007 Tabl
Page 34 and 35: UTILITIES 32 ■ NOVEMBER 2007 The
Page 36 and 37: UTILITIES 34 ■ NOVEMBER 2007 thei
Page 40 and 41: UTILITIES 38 ■ NOVEMBER 2007 Evol
Page 42 and 43: UTILITIES Publication Date: Aug. 29
Page 44 and 45: UTILITIES Publication Date: Nov. 12
Page 46 and 47: UTILITIES Publication Date: Sept. 3
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Page 52 and 53: UTILITIES 50 ■ NOVEMBER 2007 stro
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Page 58 and 59: TRANSPORTATION INFRASTRUCTURE Publi
Page 60 and 61: TRANSPORTATION INFRASTRUCTURE 58
Page 64 and 65: TRANSPORTATION INFRASTRUCTURE BAA L
Page 75: Termination events under the swap a
Page 94 and 95: PROJECT FINANCE/PUBLIC-PRIVATE PART
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PROJECT FINANCE/PUBLIC-PRIVATE PART
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RATINGS LIST RATINGS LIST Utilities
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RATINGS LIST Transportation Infrast
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RATINGS LIST Project Finance Name I
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CONTACTS KEY ANALYTICAL CONTACTS Fr
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ARGENTINA AUSTRALIA BRAZIL CANADA C
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