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Rating Action:

Moody's confirms Manchester Airport Group Funding's Baa1 ratings, negative outlook

29 Jun 2020

London, 29 June 2020 -- Moody's Investors Service (Moody's) has today confirmed the Baa1 senior secured ratings and the (P)Baa1 rating on the multicurrency medium term note programme of Manchester Airport Group Funding Plc (Manchester Airport Group Funding). The outlook has been changed to negative from ratings under review. This concludes the review process initiated on 31 March 2020.

Manchester Airport Group Funding Plc is a finance company owned by the Manchester Airport Group (MAG) and the entity issuing bonds within the group.

A full list of affected ratings is provided towards the end of this press release.

RATINGS RATIONALE

The rating confirmation recognises that under Moody's current assumptions MAG's credit metrics may recover to the levels commensurate with the current ratings over the next two to three financial years. The confirmation also takes account of the successful completion of the consent solicitation process, the promise of the shareholder support to strengthen MAG's balance sheet and the company's improved liquidity.

The rapid spread of the coronavirus outbreak, severe global economic shock, low oil prices, and asset price volatility are creating a severe and extensive credit shock across many sectors, regions and markets. The combined credit effects of these developments are unprecedented. The airport sector has been one of the sectors most significantly affected by the shock, given its exposure to travel restrictions and sensitivity to consumer demand and sentiment. Moody's regards the coronavirus outbreak as a social risk under its ESG framework, given the substantial implications for public health and safety.

Today's action takes account of the impact on MAG of the breadth and severity of the shock, recognising the potential for recovery in the group's credit quality once the coronavirus outbreak and its effects have been contained.

MAG's traffic has been severely impacted by the introduction of travel restrictions with a very limited number of flights permitted since mid-March this year. With restrictions gradually eased and airlines planning to commence or ramp up capacity during the summer season, Moody's expects flight activity to gradually resume in the second half of 2020 and continue to increase in 2021. Passenger volumes will remain, however, well below pre-coronavirus outbreak levels. The timing and profile of a recovery beyond 2021 remains highly uncertain, with passenger volumes below 2019 levels until 2023 at the earliest.

Against this backdrop, Moody's has revised its traffic assumptions for European airports recognizing that the impact of the reduction in global air travel on European airports will not be even and will vary depending on the airport location, its airline mix and type of traffic served. Domestic flights will recover earlier, with a slower return for international and long haul flights. Competitive dynamics in the London system area will be a further factor, given potential for consolidation of airline capacity and overlap whether in terms of the catchment area or routes served. Prior to the coronavirus outbreak, London Stansted accounted for some 17% of total traffic in the London system area.

Under updated traffic scenarios, Moody's assumes that the decline in MAG's passenger traffic will be at least 55% in the financial year ending March 2021, with passenger volumes unlikely to reach 2019 levels before the end of the financial year 2023/24 at the earliest. There are, however, high risks of more challenging downside scenarios, including deeper reduction in passenger volumes and a slower recovery.

Given traffic declines, MAG's cash flows will be significantly reduced this year. The extent of the decline will be only partly offset by reduction in operating costs and investments coupled with the shareholder equity support of GBP300 million. Moody's expects credit metrics to gradually improve starting from next year on the back of traffic recovery, the company's cash flow preservation measures, including reduction in investments, and planned property portfolio disposals. The pace of improvement in the company's financial profile will further depend on the evolution of airport charges, given contractual provisions included in bilateral agreements with airlines and London Stansted airport's competitive pricing in the London system area.

The Baa1 rating on senior secured notes of Manchester Airport Group Funding reflects (1) the group's ownership of three airports, with Manchester and London Stansted airports accounting for the majority of total traffic; (2) the strength of the catchment areas, coupled with a degree of competition in the London airport system area; (3) a diversified traffic profile, with the majority of traffic with other European countries; (4) a relatively high concentration of airlines, with a particular reliance of London Stansted on Ryanair, which accounted for over 70% of the airport traffic before the coronavirus outbreak; (5) an expectation of a recovery in the company's financial ratios to the levels commensurate with the current ratings over the medium term; and (6) the supportive nature of its owners as well as financing structure.

LIQUIDITY AND DEBT COVENANTS

MAG's liquidity became significantly constrained following severe traffic declines starting in mid-March 2020 despite no debt maturities before 2024. Moody's understands that as of end-May 2020, the group had approximately GBP190 million in cash and GBP10 million in availability under the revolving credit facilities of GBP500 million due in June 2023. In addition, the company has access to undrawn standby liquidity facility of GBP90 million due in June 2023. Given the planned shareholder support of GBP300 million to be received over the coming weeks, Moody's considers MAG's liquidity as adequate.

MAG's debt documentation includes two financial covenants -- net debt/EBITDA of 7.5x and interest cover ratio of 1.4x. The company has now received a covenant waiver for test periods until March 2021. The next test period will be as of end-September 2021, where the company's leverage calculation will be based on the last six months EBITDA adjusted on an annual basis. The successful completion of the consent solicitation process on 26 June 2020 [1] reflects supportive stance of the creditors in what are unprecedented circumstances for the airport sector as a whole and will give MAG the time to improve its financial profile in line with the terms of its financing structure.

RATIONALE FOR NEGATIVE OUTLOOK

The negative outlook reflects the continued uncertain prospects for traffic, with risks of extended disruption to travel leading to MAG's weaker performance or liquidity.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Given the negative outlook, upward rating pressure on Manchester Airport Group Funding's ratings is unlikely in the near term. However, the outlook could be stabilized if (1) traffic recovery looked more certain; (2) it appeared likely that the company would be able to maintain financial profile commensurate with the current rating; and (3) the company's liquidity was solid. Any assessment of the company's leverage will also consider the amount of cash held on balance sheet and its permanence in MAG's capital structure.

The ratings of Manchester Airport Group Funding could be downgraded if (1) it appeared likely that the company's credit metrics will not recover to the levels commensurate with the current ratings, namely funds from operations (FFO)/debt at least in the low teens in percentage terms or FFO interest cover above 4.5x; (2) there was a risk of further covenant breaches without adequate mitigating measures in place; or (3) there were concerns about the company's liquidity.

The principal methodology used in these ratings was Privately Managed Airports and Related Issuers published in September 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.

Manchester Airport Group Funding Plc, a finance company owned by the Manchester Airport Group (MAG). MAG is the owner and operator of Manchester airport, London Stansted airport, and the East Midlands airport. The company is ultimately owned by IFM Global Infrastructure Fund (IFM), Manchester City Council (MCC) and borough councils within Greater Manchester with economic ownership split 35.5%, 35.5% and 29% respectively (voting rights are however split evenly between IFM and MCC).

Confirmations:

..Issuer: Manchester Airport Group Funding Plc

....Senior Secured Medium-Term Note Program, Confirmed at (P)Baa1

....Senior Secured Notes, Confirmed at Baa1

Outlook Actions:

..Issuer: Manchester Airport Group Funding Plc

....Outlook, Changed To Negative From Rating Under Review

The principal methodology used in these ratings was Privately Managed Airports and Related Issuers published in September 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1092224. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

At least one ESG consideration was material to the credit rating action(s) announced and described above.

CITATIONS/REFERENCES

[1] https://www.londonstockexchange.com/news-article/38LZ/announcement-of-consent-solicitation-result/14593210

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Joanna Fic
Senior Vice President
Infrastructure Finance Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Andrew Blease
Associate Managing Director
Infrastructure Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
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