January 15, 2015 |
Fitch Ratings-London/Paris-14 January 2015: Fitch Ratings has affirmed DME Ltd.'s Long-term Issuer Default Rating (IDR) at 'BB+' with a Stable Outlook. DME operates Domodedovo Airport in Moscow. Fitch has also affirmed the rating of USD300m senior unsecured notes issued by DME Airport Limited at 'BB+' with a Stable Outlook.
The group owns the terminal buildings and leases the runways and other airfield assets from the Russian government. DME Airport Limited is a special purpose vehicle (SPV) registered in Ireland that has on-lent the proceeds from the notes to Hacienda Investments Ltd, a 100% subsidiary of DME Ltd.
KEY RATING DRIVERS
The recent downgrade of Russia's Long-term foreign and local currency Issuer Default Ratings (IDR) to 'BBB-' from 'BBB' (see 'Fitch Downgrades Russia to 'BBB-'; Outlook Negative', dated 9 January 2015, at www.fitchratings.com) has no direct impact on the ratings of DME Ltd and the notes issued by DME Airport Limited. DME Ltd's ratings reflect a standalone profile of the airport and the ratings have some headroom to accommodate negative economic trends in Russia. However, as reflected by the Negative Outlook on the sovereign rating, the economic and political environment remains volatile and Fitch will continue to monitor developments.
The ratings are capped at 'BB+' by weak corporate governance and regulatory uncertainty, although the airport's underlying credit profile was considered stronger when the ratings were assigned in November 2013. In our view, at the 'BB+' level DME can withstand sizeable stresses on traffic levels as well as higher debt service payments and higher leverage following severe rouble devaluation to approximately 60 RUB/USD.
Fitch expects a contraction in Russia's GDP of 4% in 2015 and a reduction in passenger traffic at Domodedovo Airport. Rouble devaluation and expected economic recession will significantly reduce propensity to fly, particularly with respect to international travel, due to the lower purchasing power of Russian tourists travelling abroad. International passenger traffic currently makes up about half of total traffic at DME. Fitch expects domestic traffic to decline as well, but to a lesser degree.
Fitch was already factoring in a decline in traffic to 31 million passengers in 2015, 6% lower than levels expected for 2014. We now also assume no growth in passenger traffic for 2016, compared with 5.5% previously, in line with our assumption for economic growth in Russia.
DME's debt obligations are denominated in USD and EUR, although this is partially mitigated by natural hedge as 45% of the airport's revenues are currently collected in EUR/USD or are EUR-linked, while most operating and capex costs are in RUB. Foreign currency revenues are generated through regulated USD tariffs paid by foreign airlines, some auxiliary aviation services as well as retail concession contracts.
Fitch expects the share of foreign currency revenues to decline in 2015 due to lower international traffic and possible pressure to switch to rouble-based contracts for retail concessions. But even with a significant decline of the share of foreign currency revenues to a hypothetical 20%, they should be sufficient to cover the company's foreign currency debt service commitments during 2015-2017. Senior unsecured notes of USD300m mature in November 2018 when the bullet payment will be due.
DME's leverage remains fairly low. DME estimates that debt/EBITDA would have reached 1.4x at end-2014, assuming an exchange rate of 60 RUB/USD. This would be equivalent to 1.6x as per Fitch's calculation, which adds the present value of long-term lease obligations to total debt. In our rating case, which assumes some downside potential to traffic and a 60 RUB/USD exchange rate, debt/EBITDA is now projected to peak at 3x in 2016. A stress scenario assuming a 15% traffic contraction in 2015 would result in a maximum leverage of 3.7x in 2016 assuming that DME's investment programme is not postponed. Fitch considers these figures conservative for the current ratings.
The ratings could come under pressure if DME's performance deteriorates beyond Fitch's rating case expectations. If Russia's rating is downgraded to 'BB+' or below, DME's ratings and Outlooks would be aligned with that of the sovereign.
Company: DME Airport Limited
|Full company name||DME Airport Designated Activity Company|
|Country of risk||Russia|
|Country of registration||Ireland|