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TEXT-Fitch affirms Gatwick Funding bonds at 'BBB+', outlook stable
January 22, 2013 / 3:37 PM / 5 years ago

TEXT-Fitch affirms Gatwick Funding bonds at 'BBB+', outlook stable

Jan 22 - Fitch Ratings has affirmed Gatwick Funding Limited's (Gatwick
Funding, or the issuer) senior secured notes at 'BBB+', with a Stable Outlook.

The affirmation reflects the stable operating performance of Gatwick Airport
(LGW) over the past year, as well as Gatwick Airport Limited's (GAL, or the
borrower) resilient debt metric profile, which should stand it in good stead to
cope with threats to its business that may arise over the coming years.

Traffic at LGW increased in the year to December 2012 by 1.7% to 34.2m from
33.6m, with traffic during the summer adversely affected by the London Olympics.
This compares with a decline of 3.2% at Stansted Airport (STN), which also
primarily serves the London and south-east leisure travel market, and an
increase of 0.9% at Heathrow Airport (LHR), both over the same period. For the
six months to September 2012, traffic was 1.2% higher than the same period in
the prior year, driving a 3.9% increase in aeronautical revenue. Aggregate
revenue growth in the period was constrained to 3.6% largely by the effect on
retail income of ongoing works relating to the reconfiguration of the South
Terminal departure lounge.

Operating performance continues to be very good, with penalties incurred under
the Service Quality Rebate scheme reduced to minimal levels and related
operating costs increased in line with expectation. At the same time, several
significant capital improvement work projects have been delivered on time and to
budget, including the resurfacing of the main runway, baggage factory
improvements at both terminals as well as phase 1 of the South Terminal airside
retail reconfiguration. Fitch assesses the Infrastructure/Renewal risk attribute
as Stronger due to its views on the company's capabilities for planning and
delivering such projects. Significant disruption as a result of bad weather in
January 2013 has so far been avoided following the deployment of snow-clearing
equipment acquired by GAL since 2010.

In December 2012, the Civil Aviation Bill was formally passed into law. Fitch
remains of the opinion that changes to the regulatory framework as set out in
the Bill are, themselves, ratings-neutral for Gatwick Funding. Fitch assesses
Revenue - Price risk attribute as Mid-Range, since the regulatory price reset
mechanism should take into account changes to assumptions to future traffic
prospects, but only every five years when the settlement for the next regulatory
period is determined.

Potentially a more important driver of the rating will be the final
determination to be made by the Civil Aviation Authority (CAA), the UK airports
regulator, with respect to the next regulatory period for LGW (Q6), commencing
in April 2014. Fitch will closely monitor the negotiations between the airport,
its resident airlines and the regulator over the next 12 months. Fitch has
conducted sensitivity analysis around regulatory assumptions and concluded that
Gatwick Funding's rating should prove resilient to most realistic scenarios.

Fitch believes LGW is exposed to the prospect of continued sluggishness in the
UK economy, which in the agency's opinion could lead to a contraction in demand
for leisure travel, the vast bulk of LGW's traffic. Furthermore, it is not yet
clear what impact the sale of STN to Manchester Airport Group, expected to be
completed by the end of February 2013, will have on the London leisure air
travel market. As such, the Revenue: Volume risk attribute is assessed at
Mid-Range, and Fitch's rating case reflects a relatively conservative passenger
traffic projection.

Fitch's quantitative analysis focuses on the post-maintenance interest coverage
ratio (PMICR), which reflects interest cover after adjusting for regulatory
depreciation. GAL's performance in the rating case remains in line with Fitch's
guidance of 1.50x as an appropriate average level of coverage for the current
rating, averaging 1.77x over 2012-2019. Although lower than the 1.85x average
PMICR last year, this reflects more conservative traffic assumptions, reflecting
the possibility of difficult leisure travel market conditions. Overall, Fitch
assesses the Debt Service and Counterparty attribute as Mid-Range.

A change to LGW's competitive position, as signalled, for example, by a dramatic
withdrawal of services by one of its main airlines, or a sharp and sustained
contraction in the London leisure air travel market, would likely lead to a
negative rating action. Furthermore, the adoption of a more aggressive financing
structure by GAL may also lead to negative pressure on the rating. The current
rating should be robust to most realistic regulatory outcomes, although an
extremely averse settlement from the perspective of LGW could lead to a negative
rating action.

A positive rating action in the short term is unlikely while regulatory
uncertainty remains and in light of GAL's long-term financial objective of
increasing the ratio of net debt to the value of its regulatory asset base to
around 65% from its current level of 60%.

Gatwick Funding is a special purpose vehicle set up specifically in order to
issue bonds on behalf of the borrower, the owner of LGW. All funds raised by the
issuer are on-lent to the borrower in the form of issuer-borrower loans, with
the issuer benefiting from a comprehensive covenant package and pari passu share
in borrower security along with other senior creditors. Exposure to refinancing
risk, albeit largely taken care of in the near term, constrains the Debt
Structure attribute score to Mid-Range.

Fitch will continue to monitor UK economic conditions and traffic growth at the
airport as well as other aspects of its operational performance. It will also
follow developments relating to the CAA's regulatory determination for Q6.

Additional information is available at The ratings above
were solicited by, or on behalf of, the issuer, and therefore, Fitch has been
compensated for the provision of the ratings.

Applicable criteria, 'Rating Criteria for Infrastructure and Project Finance',
dated 11 July 2012, and 'Rating Criteria for Airports', dated 27 November 2012
are available at

Applicable Criteria and Related Research:
Rating Criteria for Infrastructure and Project Finance
Rating Criteria for Airports

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