Infrastructure & Project Finance

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1 ilku Airports Full Rating Report Rating Senior Secured Project Bank Loans Outlook Senior Secured Project Bank Loans IND A- Stable Key Rating Drivers Volume Risk: The bank loan rating assigned in July 2013 reflects the operational and financial performance of the airport since it commenced operations in March Total passenger enplanements in (GHIAL) grew at a CAGR of 9.60% over FY09-FY13 (year end March). However, total enplanements declined to 8.38 million in FY13 (FY12: 8.60 million). Domestic enplanements declined 6% yoy to 6.29 million in FY13 while international enplanements grew 10% yoy to 2.09 million. In view of GHIAL s recent initiatives to further develop the airport as a regional hub, India Ratings & Research (Ind-Ra) expects domestic enplanements to grow in the coming years. The pace of recovery is, however, likely to be gradual and measured. Expansion Dependent on Passenger Growth: GHIAL s credit profile also benefits from its project completion with no expenditure on capacity expansion (linked to passenger growth numbers) envisaged at least until FY17. Although a highly-geared capital structure combined with medium-term amortising debt results in thin debt service coverage ratios (DSCR) and stress the overall credit profile, Ind-Ra expects healthy cash accruals to contribute to significant deleveraging in the next two-three years. Cash Flows Ring-fenced from Sponsor Group: The rating also reflects strong lender protection features in the project s financing documents such as a maximum debt-equity ratio of 2.2x, a dividend distribution test (1.25x DSCR in the previous year), restrictions on additional borrowing, trapping of cash flows in a trust and retention account (overseen by a trustee bank) to be appropriated under the prescribed waterfall mechanism and a debt service reserve account (DSRA, already funded to the extent of INR800m). GHIAL is constituted as an SPV, ring-fenced from its sponsors and thus insulated from sponsor-level difficulties. Price Risk Remains: The rating also reflects GHIAL s price risk from uncertainty on future tariff levels. Presently, user development fee (UDF) is levied at adhoc rates and final UDF level for GHIAL is likely to be determined by after the conclusion of the on-going tariff determination process. However, the agency s projections show resilience even in a scenario of a less-than-expected increase in UDF charges. The adhoc revision of UDF charges in October 2010 would be reviewed at the time of tariff determination. Analysts Chintan Lakhani chintan.lakhani@indiaratings.co.in Sriram Parthasarathy sriram.parthasarathy@indiaratings.co.in Subsisting Counterparty Risk: GHIAL is also exposed to counterparty risk due to the deteriorating credit quality of airlines. Total receivables as at FY13 were INR1,661.6m, of which Air India group and Kingfisher Airlines accounted for 49%. Payments from Kingfisher Airlines have been secured through monthly post-dated cheques commencing October 2012; the management asserts that none of the cheques presented for clearing till date has been dishonoured. The management is in discussion with appropriate authorities for the development of an escrow mechanism for collection of receivables from Air India (INR658.9m outstanding as at FY13). Contingent Liability: The ratings also reflect GHIAL s contingent liability in the form of INR2.42bn (INR1.94bn outstanding as on 31 March 2013) guaranteed debts for two of its subsidiaries. Owing to the proposed stake sale in one of the subsidiaries in the near future, the management expects the commitment to the subsidiary to drastically come down. However, the timing of and the sale proceeds realised from the stake sale remain uncertain and have not been factored in the agency s projections. 5

2 Sponsors Track Record: The ratings are supported by the strong and proven track record of GHIAL s sponsors. GMR Infrastructure Limited (GMR Infra, 63% equity partner), the main sponsor, is an established infrastructure developer. The sponsor also enjoys a concession on the Delhi International Airport. Malaysia Airport Holdings Berhad (MAHB, 11%) operates and manages 38 commercial airports in Malaysia, of which five are major international airports including the Kuala Lumpur International Airport. MAHB also provided technical services to GHIAL initially. Tangible Government Support: The ratings also factor in the tangible financial backing by the government of Andhra Pradesh (GoAP, a 13% equity partner). GoAP has provided INR3,150m interest-free loans to GHIAL, which are repayable in five equal annual instalments commencing after the 16th year of commercial operations. GoAP has also infused an INR1,070m advance development fund grant into GHIAL. Furthermore, the payment of an already low concession fee (4% of revenue) has been also deferred till the 11th year of operations without any additional interest. Also, annual land rent lease is payable only after the eighth year of operations which helps in easing the pressure on cash outflow during the initial years till the time ramp-up is achieved and the operations fully stabilise. Rating Sensitivities Future developments that may, individually or collectively, lead to negative rating action include: materially adverse/delayed regulatory ruling on tariffs significantly lower-than-expected enplanement levels material changes in the financial profile in terms of leverage, coverage or liquidity material deterioration in the receivables position Background GHIAL is a joint venture company sponsored by GMR Infra through GMR Airports Holding Limited (GMR s holding company for aviation vertical; owns 63% in GHIAL) in partnership with Airports Authority of India (AAI, 13%), GoAP and MAHB. The company was incorporated to design, finance, build, operate and maintain a greenfield airport at Shamshabad, Hyderabad. The company has developed and operates an international airport at Hyderabad with an initial concession period of 30 years, extendable for another 30 years at the option of GHIAL. The airport is capable of handling traffic of 12 million passengers per annum (mppa) and cargo of 1,00,000 tonne per annum. The construction cost was INR29,200m. Ownership and Sponsors GMR Infra (70.30% held by GMR Holdings Private Limited which itself is closely held by Mr. G. M. Rao and family) is the holding company for the group s initiatives in the infrastructure space pertaining to power, roads, SEZ, and airports. The group has three operational power plants with a cumulative capacity of 823MW, three operational airports, one each at Hyderabad, Delhi and Istanbul (another airport at Male was recently taken over by the Maldivian Government) and six operational road projects. Applicable Criteria Rating Criteria for Infrastructure and Project Finance (September 2012) 2

3 Figure 1 Key Features Project summary data Financial summary data Project type Airport/Infrastructure Rated debt terms (amount, interest rate, etc.) Senior Secured loan: INR8.56bn Weighted avg. interest rate: 10.25% Interest reset: Every year Project location Hyderabad Amortisation profile Amortisation: Quarterly Start date: July 2010 End date: April 2024 Status (construction/operation/ handover) Revenue basis (availability/volume/ actual/shadow) Concession maturity Concession granting authority Applicable regulation Operator Equity sponsors Source: GHIAL, Ind-Ra Operating airport Aeronautical and nonaeronautical revenue 2038 (30 years); Extendable by a further 30 years AAI The Airports Economic Regulatory Authority of India Act, GHIAL GMR Infra (through its subsidiary GMR Airports Limited - 63%, MAHB - 11%, AAI - 13% GoAP - 13% Gross Revenue and Off-take Risk Tail before concession maturity 14 years Transaction triggers Max D/E ratio of 2.2x during the tenure of the loan. Dividend lock-up provision of 1.25x Reserves DSRA-INR820m A graphical representation of passenger growth from FY09-FY13 (actuals) is shown below. Figure 2 Traffic Composition (m) Domestic (LHS) International (LHS) Growth rates (RHS) FY09 FY10 FY11 FY12 FY13 (%) Source: GHIAL and Ind-Ra Traffic Composition Historical Performance Historically, about 75% of the total passengers have been domestic and the rest international. Ind-Ra does not expect a major deviation from this trend in the long term. Ind-Ra expects domestic passenger growth to pick up FY14 onwards after plunging to negative 6.2% in FY13 owing to a weak global macro-economic environment (FY12: 16.5%, FY11: 19.9%, FY10: 3.2%). GHIAL is taking initiatives to further develop the airport as a regional hub. Ind-Ra s base case projections have assumed a steady growth rate in domestic passengers in its financial projections. International passenger annual growth rates show a varying trend. International passenger 3

4 numbers surged sharply by around 10% in FY13 (FY12: 1.4%, FY11: 9.1%, FY10: 9.6%). The annual growth rates mirror the trend in domestic passenger growth rates. Total passenger numbers have demonstrated a declining growth rate trend with FY13 showing a modest annual growth rate at negative 2.63% (FY12: 12.79%, FY11: 17.08%, FY %). The total revenue displays a volatile trend. The historical trend points towards a revenue composition of around 60% from aeronautical sources and the balance from non-aeronautical sources which is retained in Ind-Ra s projections. For building its forecasts, Ind-Ra has slightly moderated the growth rates assumed in the management case which are based on a study done by Madras School of Economics in early August Price and Regulatory Risk In October 2010, Airports Economic Regulatory Authority increased the UDF levels purely on ad-hoc basis. The UDF levels, after a detailed examination of costs and asset base, are likely to be finalised once the final tariff order is passed which would be a key rating driver. While the UDF rates may get adjusted every five years (control period), there could be a time lag leading to cash flow mismatches. Debt Characteristics and Terms Senior secured loan The total rated debt is INR8.56bn (outstanding as on 31 May 2013). The loan repayment commenced in July 2010 and will continue till April 2024 in structured quarterly installments. Proposed INR25bn loan The projections also incorporate an additional loan of INR25bn for the expansion phase which, as per the management, is expected in FY17. The repayment schedule assumed is on the lines of the debt being rated. Ind-Ra has assumed a higher interest rate (compared to the existing debt) for this loan. Since, in the base case, the traffic trigger of 12 million passengers is touched in FY22, the projections include deferred capex plans. Figure 3 Historical Financial Performance (INRm) FY09 FY10 FY11 FY12 FY13 Aero revenues 1, , , , , Aero-related revenues 1, , , , , Non-aero revenues 1, , , , , Other income Total Income 4, , , , , Operational expenses 2, , , , , Concession fee Asset replacement cost Land lease EBITDA 1, , , , , Depreciation 1, , , , , Interest costs 1, , , , , Profit before tax -1, , , Tax Deferred tax , Net income -1, , , , Source: GHIAL s annual reports 4

5 Annex 1 Rated Bank Facilities outstanding as on 31 May 2013 Figure 4 Long-Term Loans Loan Rating Outstanding (INRm) IIFCL (takeover from Yes Bank Limited Under IND A Takeout Finance Scheme w.e.f 28 May 2012) Allahahabad Bank (Till 9 November 2011) Bank of Baroda IND A Canara Bank IND A IDBI IND A IDFC IND A- 1,475.9 Oriental Bank of Commerce IND A State Bank of Hyderabad IND A Vijaya Bank IND A Andhra Bank IND A Vijay Bank IND A Total Secured Loans (INRm) 8, Source: GHIAL 5

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