Swedavia. Rating affirmed at A- Credit Research. Indicative rating: A- Credit quality outlook: Stable. February 20, 2015

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1 February 20, 2015 Credit Research Swedavia Rating affirmed at A- Near-monopoly position as an airport operator Indicative rating: A- Credit quality outlook: Stable Stable figures supported by robust passenger growth Leverage reduction puts metrics in line with A- rating Intensified focus on Stockholm and Gothenburg Swedavia is Sweden s leading airport infrastructure operator, generating stable revenues via regulated income within the aviation unit and a profitable commercial services unit. An intensified focus on core sites, namely Stockholm and Gothenburg, during 2015, will raise capex estimates. Public ratings L/T S&P: n.r. Moody s: n.r. Fitch: n.r. Indicative ratings Outlook Feb 20, 2015 Strong business risk profile, significant leverage Swedavia has a strong business risk profile, in our opinion, based on its ownership structure, role as a transport policy operative and robust passenger traffic. Leverage is significant, which would place an initial standalone rating for Swedavia at BBB, although we apply a rating modifier. Negative modifier for liquidity risk The implied standalone rating of BBB is modified down one notch to BBB-, due to the company s current liquidity profile. However, given Swedavia s public policy role, we view the company as eligible for three notches of rating uplift. Accordingly, our corporate issuer rating is A- with a stable outlook. Issuer: A- Senior Unsecured: A- Company data Web address: Swedavia is a 100% government-owned airport operating company, managing ten airports in Sweden identified by the state as key holdings; National Basic Infrastructure (NBI). Swedavia had assets of just over SEK 15bn at 2014 year-end and almost 2,500 employees. CEO: Torborg Chetkovich Paul Betton, , pabe04@handelsbanken.se Johan Sahlström, , josa23@handelsbanken.se Key figures Sw edavia (msek) * Revenues 4,693 4,965 5,233 5,538 EBITDA 1,613 1,681 1,887 2,004 EBITDA margin 34.4% 33.9% 36.1% 36.2% EBIT ,057 EBIT margin 17.0% 17.1% 18.2% 19.1% Net income Investment Properties (Fair Value) n/a 2,576 4,736 n/a Funds from operations (FFO) 1,108 1,188 1,498 1,765 Capex (inc. disposals) -1,112-3,341-2, Dividends Total debt 5,844 7,687 8,537 6,921 Net debt 5,703 7,558 8,485 6,809 Net debt (adjusted) 6,276 8,170 9,069 7,393 Net debt to EBITDA, x (adjusted) EBITDA to interest expense, x (adjusted) FFO to net debt (adjusted) 17.7% 14.5% 16.5% 23.9% Return on equity 11% 11% 11% 11% Equity-asset ratio 33% 29% 30% 36% Net debt to equity (adjusted) 157% 190% 185% 133% Debt to capital (adjusted) 62% 66% 65% 57% Employees (Average) 2,265 2,380 2,369 2,460 Revenue distribution Revenues 2014, by business area Aviation (55%) Car Parks (14%) Retail, Food & Beverage (12%) Other Property (11%) Other (6%) Advertising (2%) * 2014 figures adj. for disposals of SEK 347m. Source: Company reports and Handelsbanken Capital Markets Source: Swedavia AB, Q Report For full disclaimer and definitions, please refer to the end of this report.

2 Company highlights Strong passenger numbers contributed to a solid result from airport operations with both aviation and commercial services reporting higher year-on-year results. Property assets are still to be divested, which at current valuations would derive a healthy profit. After meeting its financial targets, Swedavia s board proposed a dividend of SEK 230m, the first material dividend paid by the company since its inception. Positive passenger trend over the last four years Industry trends and company developments Despite an uncertain macroeconomic outlook and modest consumer sentiment, passenger volumes continue to increase at Swedavia s sites with six of Swedavia s ten airports reporting record passenger numbers for Total passenger numbers increased during the period to SEK 35.7m, or 6.4% y-o-y. Domestic and foreign traffic increased by 3.8% and 7.9% y-o-y, respectively. Over the last four years, total passenger numbers have risen 30%. Swedavia s board announced plans to review the time frame of its previously initiated investment programmes. An intensified focus on the Stockholm (Bromma) and Gothenburg sites is proposed for this year, while time frames relating to the Arlanda site are under review. The objective of the review is to better allocate resources to core strategic sites as passenger traffic increases. Financial performance Airport operations (aviation and commercial services) Revenue from aviation increased by SEK 164m to SEK 2,973m, driven mainly by passenger-related revenues, which increased SEK 128m in y-o-y terms. Revenue from commercial services rose to SEK 2,447m (SEK 2,329m) with car parks and other commercial services rising by SEK 76m and SEK 130m, respectively, offsetting a y-o-y drop in revenues in the other property segment. Divestment of real estate portfolio still planned Real estate operations The disposal of the hotel property at Stockholm Arlanda airport in Q generated a profit of SEK 347m, which is excluded from top-line revenues and subsequent metrics. Additionally, the real estate unit reported a one-time item for the early termination of rental contracts amounting to SEK 36m. We understand that Swedavia is still looking to divest property assets through a joint venture (JV). Assets are currently classified on the balance sheet as held-forsale. The potential impact on the business risk and adjusted credit metrics from such a transaction are not factored into the current rating. In a future JV, we see LTVs close to 50% (based on market values) as broadly consistent with a standalone rating of BBB. While we do not expect a divestment to affect the rating, this will ultimately depend on the ownership, capitalisation and contractual arrangements associated with such a transaction. Any sale would likely result in a healthy capital gain; at the end of 2014, the real estate division had a portfolio book value of SEK 3.0bn with a market value well in excess of this amount. Positive outcome of the Arlanda flight path appeal Site development and environmental permits At the end of 2014 Swedavia was granted a new environmental permit. The permit relates to and supersedes an old appeal made against Swedavia in March 2014 pertaining to one of Arlanda s flight paths; specifically runway 3 and the Upplands- Väsby approach area. Under the new permit, flights are permitted to continue on this flight path beyond 2018, paving the way for the planned development of the site. 2

3 Leverage and financial policy 1 Adjusted net debt was SEK 7,393m at the end of This was a reduction of SEK ~1.6bn compared to year-end 2013, partly due to proceeds from the disposal of property assets at the Arlanda site, which amounted to SEK 1,100m. Adjusted net-debt-to-ebitda fell to 3.7x (4.8x at the end of 2013). Swedavia had a return on operating capital of 10.3% as of the end of 2014 (the company s own target is at least 7.0%), and a debt-to-equity ratio of 133% (185%). Given that the company achieved its financial targets 2 the board proposed a dividend of SEK 230m, which is the first meaningful dividend paid by Swedavia since its inception. 1 Adjustments to debt relate to pension liabilities and amount to ~SEK 580m. 2 Dividend policy is conditional upon the debt/equity target being met. 3

4 Creditworthiness We rate Swedavia at A-, which includes three notches of uplift due to ownership support. Supportive factors for the rating are its ownership structure; role as a transport policy operative; and, the robust, positive trend in passenger numbers. The implied standalone rating of BBB, based on a strong business risk profile and significant financial risk, is reduced by one notch to BBB- due to a negative rating modifier. Implied standalone rating modified down one notch Standalone rating We see Swedavia as having a strong business risk profile and significant leverage. The strong business risk profile is supported by its ownership structure, nearmonopoly position and the company s robust growth in passenger numbers. The financial risk is well balanced within the significant category with net-debt-to- EBITDA within a 3x-4x range and FFO-to-net-debt above 20%. The strong business risk and significant leverage would usually imply a BBB standalone rating; however, a weak liquidity profile, in our opinion, warrants a one notch rating modifier resulting in a standalone rating of BBB-. We also note the exposure to SAS in the aviation and real estate units. Profitability and leverage EBITDA and EBIT margins were solid at 36.2% (36.1%) and 19.1% (18.2%), respectively, despite the diluted margin effect from the low margin revenues associated with the regulated aviation business. Operating profit, excluding the sale of property at Stockholm Arlanda site, was SEK 1,057m (SEK 946m) driven mainly by robust passenger traffic. With adjusted net-debt-to-ebitda at 3.7x and adjusted FFO-to-net-debt at 23.9%, we consider leverage and metrics to be in line for a standalone rating of BBB-, given the current company structure. Temporary capex increase not expected to effect leverage Capex and liquidity Capex for 2014, excluding disposals, was SEK 924m (SEK 2,413m), in line with the company s proposed annual maintenance figure of SEK ~1bn. In the Q report, management announced plans to intensify investment, focusing on the company s sites in Stockholm (Bromma) and Gothenburg. We consider this a prudent strategy, but note the current rating could come under pressure if investment spending significantly exceeds previous estimates, leading to increased leverage. Expectations are for internal cash flow, driven by disposals, to cover additional spending, which is expected to take capex up to SEK 1.3bn during Swedavia holds minimal cash on balance. Other liquidity takes the form of unutilised credit facilities of SEK 710m. SEK 500m relates to a committed credit line maturing in 2018 and SEK 210m in an overdraft facility. The facilities are unsecured and have no covenants. Swedavia states it has no specific liquidity policy to manage upcoming debt maturities. Cash and facilities combined currently correspond to a cash-expense coverage of less than one year. We consider the loose liquidity policy and low cash-expense coverage as a negative factor. Ownership & rating Swedavia is 100% owned by the Swedish government. We note that the domestic MTN programme contains an ownership clause allowing investors to put bonds if government ownership falls below 100%. In our view, Swedavia has a strong link to the government given its role in implementing air transport policy. We see a high 4

5 likelihood 3 of extraordinary support and add three notches of rating uplift to the standalone rating. We currently consider there to be limited upward potential for the current rating. Downward pressure would arise if financial risk moved from significant to aggressive; for example, if capex increased considerably from the company s current forecast. With a standalone rating of BBB- and three-notches of uplift, due to implicit government support, we see Swedavia s issuer rating as A-. The outlook is Stable. 3 As per S&P classifications. 5

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