Fitch assigns Mumbai International Airport's Proposed USD Bonds First-Time 'BB+(EXP)'

23 Feb 2022 , 08:45 AM

Fitch Ratings has assigned Mumbai International Airport Limited’s (MIAL) proposed US dollar bonds an expected rating of ‘BB+(EXP)’. The Outlook is Stable. The bond proceeds will be used to repay the bridge loan facility at MIAL, and for capex. The final rating on the proposed bonds is contingent upon the receipt of final documents conforming to information already received.

RATING RATIONALE
The rating reflects Mumbai’s strong passenger growth potential in the medium-to-long term, MIAL’s regulated asset base, higher contribution of domestic traffic than international traffic and adequate financial profile. The rating case assumes a full recovery of traffic to pre- pandemic levels by end-2024, with leverage, on average, of 7.6x over FY23-FY27 (financial year end March). The Stable Outlook reflects MIAL’s large headroom against our negative rating action trigger of 10.0x.

Mumbai is the industrial and financial hub of India. Within the regulatory framework, the concessionaire earns return on its regulatory asset base (RAB), the aeronautical tariffs are determined under a hybrid till with 30% of non-aeronautical revenue for cross-subsidisation and the concession fee is based on a revenue share of 38.7% to Airports Authority of India (AAI). The fairly stable domestic traffic contributes 73% to MIAL’s total passenger base.

MIAL’s capex is mainly maintenance capex with some portion of the capex aimed at improving runway efficiency.
The expected rating also considers likely capacity constraints at the airport in the medium term and the operation of Navi Mumbai International Airport Limited (NMIAL) from FY25 to cater for additional traffic growth in Mumbai. The passenger base in the FY20 was 46 million and has grown at CAGR of 9% over the past five years.

MIAL is a SPV, incorporated in March 2006 to design, develop, construct, upgrade, operate, maintain and manage Chhatrapati Shivaji Maharaj International Airport (CSMIA) in Mumbai, has a 30-year concession from May 2006 with a provision for a 30-year extension.

KEY RATING DRIVERS
Demand Affected by Pandemic, Strong Fundamentals: Revenue Risk – Stronger
CSMIA is the second-largest airport in India, serving as an origin-and-destination airport to the growing Mumbai metropolitan region population of 22 million. The enplanement base was 11 million in FY21 (FY20: 46 million) with a mix of business and leisure travel. The airport’s catchment area and regional economy has strong underlying economic demand, with the passenger traffic growing over 9% in the past five years. The pandemic has severely affected the traffic levels with a drop in FY21 traffic by 76%. Fitch expects recovery to pre-pandemic levels by the end of 2024.

Fitch expects CSMIA to reach its full capacity of 60 million passengers by FY29, after the maintenance capex to meet efficiency levels. NMIAL, the city’s second airport, is set to be operational by FY25 to cater for additional traffic growth and will have an initial capacity of 20 million passengers by FY27, expandable up to 60 million passengers. CSMIA will remain the primary integrated airport, while NMIAL will absorb domestic demand constrained at CSMIA and take on spillover international demand.

Tariff Mechanism Monitored by Regulator: Price Risk – Midrange
The Airports Economic Regulatory Authority (AERA) of India has confirmed the hybrid till regulatory framework with 30% non-aeronautical revenue used for cross-subsidisation. The regulatory regime for airport operators is evolving, as evident from the delay in various control period tariff orders. But there are no major pending disputes with the regulator. The control period 3 (CP3) tariffs (FY20-FY24) were delayed by two years to April 2021 because of the pandemic. The aeronautical tariffs charged by MIAL will be no less than the base airport charges as stipulated in the state support agreement, according to AERA.

Capacity Constrained, Mainly Maintenance Capex: Infrastructure Development/Renewal – Midrange
Fitch expects CSMIA to reach maximum capacity by FY29. CSMIA is the busiest single runway airport in the world, handling up to 53 air traffic movements per hour and on peak days handling up to 1,004 movements a day. MIAL aims to increase the efficiency of its runway operations to increase runway utilization and cater to the higher passenger base.

MIAL estimates capex in CP3 FY22-FY24 is INR29 billion, including interest during construction with regard to INR19 billion approved by AERA. Fitch believes that the Adani Group, which manages projects across various sectors, has the execution capabilities for MIAL’s capex plan even though the contracts are yet to be finalised.

Ringfenced Structure, Manageable Refinance Risk: Debt structure – Midrange
The proposed dollar bonds benefit from seniority, security and a protective debt structure – ringfencing of all cash flow and a set of covenants limiting leverage, defined as net debt/EBITDA, to 5x and funds from operations/net debt is not less than 10% with a 40% margin up to 24 months after issuance or a shorter period at the company’s sole discretion.

Refinancing risk is mitigated by the long concession life, extendable till 2066. The bondholders will benefit from an escrow account for the proposed bonds, which have a cash waterfall mechanism in place excluding the airport development fee (ADF) receipts and funds received from NMIAL or for investment in NMIAL thereby insulating MIAL from the obligations of NMIAL. The bondholders will also benefit from a six-month reserve for interest.

Ongoing Investigations Against MIAL:
The Enforcement Directorate of India is investigating a money laundering case against GVK Group, previous owner of MIAL, and MIAL to assess alleged irregularities to the tune INR7 billion in maintaining the Mumbai airport. According to MIAL’s current management, the investigation is ongoing, no member of the current management is under investigation and no legal case has been filed as yet. It’s uncertain as to what extent will MIAL be involved in the proceedings. However, we were informed that MIAL was used as a conduit to launder money and lost its cash in the process. Fitch would consider any unfavourable outcome against MIAL as an event risk.