Ratings On Sydney Airport Raised To #BBB+# On Stronger Financial P Outlook Stable

Stocks and Financial Services Press Releases Tuesday March 27, 2018 09:54
SYDNEY--27 Mar--S&P Global Ratings

SYDNEY (S&P Global Ratings) March 27, 2018--S&P Global Ratings said today that it had raised its issuer credit rating on Southern Cross Airports Corp. Holdings Ltd. (SCACH) to 'BBB+' from 'BBB'. The outlook is stable. At the same time, we raised the underlying issue ratings on all of Sydney Airport group's senior secured debt issued by Sydney Airport Finance Co. Pty Ltd. to 'BBB+' from 'BBB'. We have raised the ratings because we expect Sydney Airport to continue generating strong cash flows on the back of resilient passenger numbers under a number of different economic growth scenarios.

The upgrade also reflects our view of the supportive regulatory regime and the company's financial policies regarding capital-expenditure funding and dividends. In particular, we expect SCACH's funds from operations (FFO)-to-debt will remain more than 9% over the next several years. We do not see a competitive threat for Sydney Airport at least over the next several years with the proposed construction of a second airport in the state. In May 2017, Sydney Airport rejected the opportunity to develop and operate the Western Sydney Airport (WSA), which the Australian government has decided to undertake. Given that the likely commissioning date will be in December 2026, the WSA might modestly increase competition only in the longer term. We expect the WSA will be relatively small, serving no more than probably 3 or 4 million passengers per annum, compared with Sydney Airport's traffic currently of more than 43 million passengers per annum.

Importantly, we believe that Sydney Airport will not seek to deploy additional capital for acquisitions. We also expect the company to maintain its existing financial policies and not implement any shareholder-friendly measures that could lead to higher leverage than our expectations. Sydney Airport has a policy of distributing 100% of its operating cash flows as dividends and typically funds its capital expenditure with debt. Sydney Airport is the sole major airport covering Sydney, Australia's largest population center. Further supporting this dominant position is the lack of viable alternative public transport connecting Australia's major cities and Sydney's attractiveness as a business and tourism destination.

These factors have supported consistent passenger growth over the past 25 years, even at times when the industry faced material external pressure (for example, political uncertainty, health scares). We expect traffic to continue to grow over the next several years, albeit at a slower pace than in recent years. Our base case incorporates international traffic growth of about 5% in 2018 and about 4.5% in 2019.

Domestic traffic will likely remain subdued, and we expect it to grow at about 2% on average over the next couple of years, slightly lower than our GDP forecast of about 3% for Australia. We expect Sydney Airport's higher earnings will offset its increased debt to fund its capital expenditure. Sydney Airport plans to deploy sizable capital in the range of A$1.3 billion–A$1.5 billion over the next four years, including spending to address capacity constraints. We believe the company's stronger earnings will balance this increased debt load to fund the capital expenditure.

We therefore expect SCACH's FFO-to-debt ratio to remain comfortably above 9% over the next several years. Sydney Airport's current tariff agreements for its T1 international terminal will expire over the next one to two years. We expect the airport will achieve tariff agreements with key stakeholders covering the proposed capital expenditure. Our base-case scenario also incorporates further growth in the non-aero commercial segment (retail and commercial properties, including hotels and office developments), which contributes about half of Sydney Airport's total revenue. The stable outlook reflects our view that Sydney Airport will remain as one of the two dominant domestic and international airports in Australia (the other being Melbourne Airport).

We believe that continued growth in international passenger numbers will enable Sydney Airport to generate strong cash flows, such that the company will operate with FFO-to-debt of more than 9% over the next several years.

The outlook also reflects the resilience of Sydney Airport's passenger demand to external shocks. For example, the global financial crisis or Severe Acute Respiratory Syndrome (SARS) epidemic had only short-lived impacts. Given our view of Sydney Airport's key business strengths, we see any negative pressure on the rating as unlikely over the next couple of years. All else being equal, the ratings could come under pressure if the ratio of FFO-to-debt were to drop below 8% with no prospect of recovery.

This could most likely happen if passenger volumes were to significantly underperform our forecast while Sydney Airport materially overspends on capital works. We view prospects of an upgrade as unlikely. That said, we would consider an upgrade if we were to forecast SCACH's FFO-to-debt will sustain at more than 10% and the management is committed to maintaining such an improved profile.


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