Mexico City Airport Trust#s $4 Billion Senior Secured Debt Assigned #BBB+# Outlook Stable

Stocks and Financial Services Press Releases Tuesday September 26, 2017 09:05
MEXICO CITY--26 Sep--S&P Global Ratings

MEXICO CITY (S&P Global Ratings) Sept. 25, 2017--S&P Global Ratings said today that it had assigned its 'BBB+' issue-level rating on the $4 billion of new senior secured debt issued by Mexico City Airport Trust (Fideicomiso 80460 or the trust). The rating outlook on the debt is stable. The 'BBB+' rating on the trust's new senior secured debt reflects the credit quality of the sponsor of this transaction, Grupo Aeroportuario de la Ciudad de Mexico S.A de C.V. (GACM).

The rating depends on GACM because we believe that the continued operation of the Mexico City airport is critical to generating airport passenger revenue (Tarifa de Uso de Aeropuertos; TUA) that will support debt repayment. GACM is a government-related entity (GRE) wholly owned by the Mexican government. GACM is the concession holder of the new Mexico City Airport (NAICM) and also owns Aeropuerto Internacional de la Ciudad de Mexico, S.A. de C.V. (AICM), the concession holder of the existing airport. We also factor the likelihood of extraordinary government support into our rating analysis.

Our assessment of the very high likelihood of support reflects the following factors: The airport's very important role, due to the economic and political importance of existing and future airports to the government. In our view, the airport provides an essential service to the population of Mexico--especially to Mexico City--as the main gateway to the country's capital; andThe airport's very strong link to the government, because we consider that the airports are in charge of managing and expanding one of the major infrastructure assets of the country in strict accordance with the government's plans. The assessment of the link also factors in the government's permanent involvement in the airport's supervision, management, and strategic decisions; including its strong influence on its board of directors. Furthermore, the link reflects the government's consistent record of support to the company through annual financial contributions, largely to finance the new airport's construction.Therefore, although the debt ratings closely correlate with GACM's credit quality, the sponsor's creditworthiness is not necessarily a cap, because we think the Mexican government is highly likely to provide extraordinary support should the trust face financial distress.

A key characteristic of this transaction is that the bulk of the airport's revenue will come from the TUA. This gross revenue will be available to the trust to service its debt obligations ahead of other costs. However, depressed traffic could potentially trap available cash after debt service at the trust level, leaving GACM to rely solely on non-TUA revenue to cover the airport's operating costs. Currently, the TUA represents about 60% of the airport's total revenue. The seniority of debt service payments provides credit support for secured creditors. However, we believe that the debtstructure relies on GACM for a number of reasons. In particular, GACM, through AICM, holds the concession to operate the existing airport, so a default under the concession could put future TUA at risk. Continued cash flows to the trust from the TUA also rely on the continued operation of the airport, which is ultimately GACM's responsibility.

As a result, we believe GACM's credit quality will largely constrain the debt rating. Although the trust is a special purpose vehicle with recourse limited to the TUA receivables, we don't believe that the primary reason for the structure was to limit GACM's, and ultimately the government's, liabilities. We view the trust as akin to being the financing vehicle of GACM. The trust structure provides additional comfort to secured creditors, compared to simpler corporate senior unsecured financing that GACM could have arranged. We consider the trust entity a GRE for two reasons. First, under the concession agreement, GACM and AICM cannot pledge most of their assets to support financing. However, the TUA receivables are one of the few assets that they can pledge.

Second, unlike typical project finance structures, this transaction doesn't seek to transfer construction or operation risks to a private sector entity. Another differentiating factor in this transaction relates to the construction of the new airport and the fact that a significant number of construction tasks are in progress. The overall construction phase, in our view, has limited similarities to traditional project finance transactions with construction risks, which are usually characterized by fixed price construction contracts for the entire construction phase and full funding available at inception. This is because completion of the asset is generally critical to repayment of the debt. However, for this transaction, we've only focused on existing cash flows from the current airport.

Our analysis indicates that those cash flows are sufficient to repay the debt. Given the unique characteristics of this transaction, we rate it based on our "Principles Of Credit Ratings" methodology. In particular: We haven't assessed the construction phase of the new airport. Typical project finance transaction ratings with construction risk reflect the combined risk of the project across both the construction and operation phases. The construction assessment is necessary as it determines the risk that the asset may not be constructed, and therefore, the project may not generate cash flows to the expected level. In our forecast for this transaction, we solely assess the cash flows from the existing airport and don't include any uplift related to passenger growth that the new facilities would be able to handle.

We've assessed the cash flow coverage according to the contractual cash waterfall at the trust level. In typical project finance transactions, an asset's operating costs incurred in its operations and maintenance would have priority over senior debt-servicing costs, because continued operations at the airport would be necessary to ensure that it generates cash. In this transaction, residual cash flow after debt service at the trust level will partly cover operating costs. Other airport revenues, such as revenue from commercial activities, supplement payment of operating costs. We believe that notionally amending the trust's cash flow waterfall by adding operating costs wouldn't capture the overall project's ability to cover these costs, given that the trust does not capture all revenues. Instead, in order to recognize the importance of continued operations for ongoing cash flows, we consider GACM, the operator of the airport and wholly owned by the Mexican government, as an irreplaceable counterparty. Therefore, the credit quality of GACM caps the stand-alone credit profile (SACP) of the trust.The stable outlook primarily reflects the outlook on the credit quality of GACM, which itself reflects the outlook on the foreign currency sovereign rating of Mexico. From an operational perspective, we expect the airport's passenger traffic to grow in the low single digits over the next two years. Given the link between the project rating and GACM's credit quality, the rating on the senior debt would be at risk if GACM's creditworthiness were to deteriorate.

This could occur if our view of government support for GACM in the event of financial stress were to weaken. Any severe underperformance of passenger traffic or material debt cost increase (due to debt levels above our expectation or a significant increase in debt margins) could also put the rating at risk. In particular, downward rating pressure could arise if we were to expect that the cash flow coverage would not remain broadly above 1.0x based on cash flows from the existing airport only. (We have revised the aforementioned ratio expectations based on our updated financial projections, which reflect the project's new debt amortization schedule.) Such a scenario would also likely affect GACM's credit quality, since we include the project's debt in our assessment of GACM.

Our assessment of GACM's credit quality constrains the rating, which, as noted above, is limited by the foreign currency rating on Mexico. Therefore, the ratings should move in tandem with the sovereign. The direct link with the sovereign outlook is also because we expect that GACM or the government would cover any increased funding required for the new airport over and above budgeted amounts.


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