July 02 -
-- We believe that the credit metrics of U.K.-based airport operator Birmingham Airport Holdings Ltd. (BAHL) will have improved in the 12 months to March 31, 2012, on the back of a recovery in its operational performance.
-- We are therefore revising the outlook on BAHL to stable from negative and affirming our 'BBB+' long-term and 'A-2' short-term corporate credit ratings on the company.
-- The stable outlook reflects our view that BAHL will maintain credit metrics that are commensurate with the rating in the near term.
On July 2, 2012, Standard & Poor's Ratings Services revised its outlook on U.K.-based airport operator Birmingham Airport Holdings Ltd. (BAHL) to stable from negative. At the same time, we affirmed our 'BBB+' long-term and 'A-2' short-term corporate credit ratings on BAHL. In addition, we affirmed our 'BBB+' issue rating on BAHL's senior unsecured debt.
The affirmations reflect our view that a recovery in BAHL's financial profile in the 12 months to March 31, 2012, will sustain credit metrics that are commensurate with our 'BBB+' rating. The affirmations are supported by our assessment of BAHL's "satisfactory" business risk profile and "intermediate" financial risk profile.
Despite the weak economic environment in the U.K. (AAA/Stable/A-1+; Unsolicited Ratings), BAHL has seen passenger numbers increase by 0.9% in the financial year to March 31, 2012. In addition, the company has continued its efforts to improve profitability, and we anticipate high single-digit growth in EBITDA in financial year 2012 compared with the previous year.
We anticipate that Standard & Poor's-adjusted funds from operations (FFO) to debt will be about 24% at March 31, 2012, compared to about 19% the previous year. In addition, we estimate that adjusted debt to EBITDA will be less than 3x, down from 3.6x the previous year. The improvement reflects BAHL's operational performance during the year. It also reflects our decision to consider as surplus cash the company's cash and cash equivalents, which reduces adjusted debt. This decision seeks to ensure better comparability of BAHL with the other airports we rate in Europe.
The ratings on BAHL reflect our view of the company's stand-alone credit profile (SACP), which we assess at 'bbb+', as well as our opinion that there is a "low" likelihood that BAHL's seven U.K. borough council owners would provide timely and sufficient extraordinary support to BAHL in the event of financial distress.
In accordance with our criteria for government-related entities (GREs), we base our assessment of a "low" likelihood of support on BAHL's:
-- "Limited importance" for the regional economy, as we believe that the councils are likely more interested in BAHL's operations rather than in its credit standing.
-- "Limited" link with the council owners, who are minority shareholders and have a combined 49% ownership of the company's capital.
The short-term rating on BAHL is 'A-2'. We assess BAHL's liquidity as "strong" under our criteria, underpinned by significant cash balances and no debt repayments in the medium term. We estimate that liquidity sources will cover uses by about 2.6x for the 12 months to March 31, 2013, and we forecast that this ratio will remain more than 1x for the following 12 months.
We calculate total sources of liquidity of approximately GBP100 million over the next 12 months, comprising:
-- Surplus cash and cash equivalents of about GBP28 million on March 31, 2012;
-- Our forecast of FFO of about GBP28 million over the period; and
-- Availability of GBP45 million under two liquidity lines expiring in June 2015.
We calculate liquidity uses over the period of about GBP40 million, comprising:
-- No maturing debt; and
-- Our forecast of investments and dividend payments of about GBP40 million.
BAHL's financing, including its undrawn bank lines, include financial covenants--notably, minimum consolidated tangible net worth of GBP100 million; a maximum leverage ratio of 4x; minimum interest coverage of 3x; and a limit on capital expenditure (capex). We believe that BAHL will continue to remain comfortably in compliance with these covenants.
The stable outlook reflects our view that BAHL will continue to see a gradual increase in revenues and EBITDA. The outlook also reflects our anticipation that adjusted FFO to debt will remain more than 23%--taking into account the company's cash balances--and that adjusted debt to EBITDA will remain less than 3.5x. These levels are commensurate with the ratings.
The ratings on BAHL could come under pressure if the adjusted FFO-to-debt ratio falls to less than 23% or the adjusted debt-to-EBITDA ratio increases to more than 3.5x. This could result, for instance, from a weakening of economic conditions in the U.K., leading to decreases in passenger numbers, or from the failure of airlines using Birmingham Airport. We could also lower the ratings if the company adopts a more aggressive financial policy.
Rating upside could occur if BAHL's credit metrics increase significantly and we view this improvement as sustainable. Such improvement would be consistent, in our view, with adjusted FFO to debt of more than 35% and adjusted debt to EBITDA of less than 2.5x. However, we see such a significant improvement in credit metrics as unlikely in the near term.
Related Criteria And Research
All articles listed below are available on RatingsDirect on the Global Credit Portal, unless otherwise stated.
-- Short-Term/Long-Term Ratings Linkage Criteria For Corporate And Sovereign Issuers, May 15, 2012
-- Economic Research: No Fast Lane Out Of Europe's Recession, April 4, 2012
-- Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
-- Credit FAQ: How S&P Derives Its Ratings On Government-Related Entities, April 4, 2011
-- Principles Of Credit Ratings, Feb. 16, 2011
-- Rating Government-Related Entities: Methodology And Assumptions, Dec. 9, 2010
-- Stand-Alone Credit Profiles: One Component Of A Rating, Oct. 1, 2010
-- Use Of CreditWatch And Outlooks, Sept. 14, 2009
-- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, May 27, 2009
-- 2008 Corporate Criteria: Rating Each Issue, April 15, 2008
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
Ratings Affirmed; CreditWatch/Outlook Action
Birmingham Airport Holdings Ltd.
Corporate Credit Rating BBB+/Stable/A-2 BBB+/Negative/A-2
Birmingham Airport (Finance) PLC
Senior Unsecured Debt* BBB+ BBB+
*Guaranteed by Birmingham Airport Holdings Ltd.