S&P Downgrades Delhi International Airport to 'B-' on Heightened Liquidity Risks
S&P Global Ratings on Thursday lowered its ratings to 'B-" on Delhi International Airport Ltd (DIAL) due to uncertainty in the company's receipt of commercial property development (CPD) income and deposits from Bharti Realty Ltd.
"Our base case no longer considers these cash-flows because CPD income has now been delayed for more than one year and we have no visibility on the timeline for resolution. We believe DIAL could face increased liquidity risks given its high dependence on CPD cash-flows to support interest obligations and capital expenditure (capex) amid continuing regulatory uncertainty," the ratings agency says.
S&P forecast DIAL's funds from operations (FFO) cash interest coverage will be below 1.0 times over the next 12 months.
The ratings agency has cut down its long-term issuer credit rating on DIAL and its long-term issue rating on the company's senior secured notes to 'B-' from 'B+' and decided to keep the ratings on credit watch where they were first placed with negative implications on 20 March 2020.
"The credit watch reflects our view that DIAL's capital structure could become increasingly unstable without CPD income, which would heighten refinancing risks for the company's bond due in February 2022," it added.
S&P says in its view, the complexity in obtaining Airport Authority of India (AAI) approval for DIAL's CPD transaction with Bharti Realty is higher than it had expected. This, it says, has increased uncertainty on the timing of the transaction.
"Further, given that the transaction has not closed, we believe there could be increased risks of contract renegotiation or even cancellation. However, we believe Bharti Realty and DIAL are still keen to close the deal, as they have extended the deadline for closure to 31 December 2020," it added.
DIAL had expected its transaction with Bharti Realty to close in September 2019 which would have resulted in lease rentals of about Rs3.6 billion per year and a one-off upfront security deposit payment of about Rs15.3 billion.
According to the ratings agency, DIAL's high dependence on CPD income to support cash-flows and capex results in volatility in cash-flows and profitability that is higher than expected, despite the greater predictability of base airport charges (BAC). Furthermore, it says it believes DIAL's weakened profitability due to lower passenger traffic and high fixed costs is exacerbated by the company's high 46% revenue share with AAI.
"However, persistent delays in DIAL's CPD development makes it difficult for the company to manage its cost base as effectively as peers in periods of downturn. In comparison, GMR Hyderabad International Airport Ltd, which operates with just a 4% revenue share that is recoverable under its tariff, is not exposed to the same weakness in profitability, despite its own tariff cuts and weaker traffic," S&P says.
In the absence of CPD cash flows, the rating agency says it anticipates DIAL's FFO interest coverage will fall below 1.0 times over its five-year projection horizon.
"The company's high cash balance would likely be depleted at a faster pace given that its large committed expansion plans were highly dependent on the receipt of CPD funds. This, combined with significantly weaker passenger traffic due to COVID-19 travel restrictions and large interest servicing costs, would put pressure on DIAL's ability to service its interest obligations over our projection horizon," it added.
While the ratings agency says it does not view DIAL's capital structure as unsustainable, even though its interest servicing ratio is below 1.0 times, it understands the company is considering a few options that could preserve cash in the absence of CPD money. These include obtaining lease financing for up to Rs20 billion of its capex for mobile equipment and which could offer significant cash-flow relief.
"Further, DIAL will be able to service interest during construction through debt, as part of its capex facilities. We also note that the company's cash balance of Rs29.5 billion (as of 30 September 2020) will be sufficient to meet its capital spending over the 12 months to 30 September 2021, and that debt maturities over this period are minimal," S&P says.
However, the ratings agency feels that DIAL could face heightened refinancing risks over the next 12-18 months in the absence of CPD income or other funding sources, as the company approaches its bond maturity in February 2022.
"DIAL's high dependence on CPD money to meet interest obligations, lack of committed alternative funding sources amid a materially weaker operating environment, and high committed capex create further difficulties to refinance its February 2022 bond amid uncertain market conditions," S&P concludes.